ONWARD
TOGETHER
2 0 1 9 a n n u a l r e p o r t
Except where otherwise indicated, all financial information reflected in this document is expressed in Canadian dollars and determined on the basis of United States
generally accepted accounting principles (GAAP).
Certain statements included in this annual report constitute “forward-looking statements” within the meaning of the United States Private Securities
Litigation Reform Act of 1995 and under Canadian securities laws. By their nature, forward-looking statements involve risks, uncertainties and assumptions.
The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions, although reasonable
at the time they were made, subject to greater uncertainty. Forward-looking statements may be identified by the use of terminology such as “believes,”
“expects,” “anticipates,” “assumes,” “outlook,” “plans,” “targets” or other similar words.
Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cause the actual
results or performance of the Company to be materially different from the outlook or any future results or performance implied by such statements.
Accordingly, readers are advised not to place undue reliance on forward-looking statements. Important risk factors that could affect the forward-looking
statements include, but are not limited to, the effects of general economic and business conditions; industry competition; inflation, currency and interest
rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance with environmental laws and regulations; actions by
regulators; increases in maintenance and operating costs; security threats; reliance on technology and related cybersecurity risk; trade restrictions
or other changes to international trade arrangements; transportation of hazardous materials; various events that could disrupt operations, including
natural events such as severe weather, droughts, fires, floods and earthquakes; climate change; labour negotiations and disruptions; environmental
claims; uncertainties of investigations, proceedings or other types of claims and litigation; risks and liabilities arising from derailments; timing and
completion of capital programs; and other risks detailed from time to time in reports filed by CN with securities regulators in Canada and the United
States. Reference should be made to “Management’s Discussion and Analysis” in CN’s annual and interim reports, Annual Information Form and Form
40-F, filed with Canadian and U.S. securities regulators and available on CN’s website (www.cn.ca), for a description of major risk factors.
Forward-looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise forward-looking
statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities laws. In the event CN does
update any forward-looking statement, no inference should be made that CN will make additional updates with respect to that statement, related
matters, or any other forward-looking statement.
As used herein, “Company” or “CN” refers to Canadian National Railway Company and, as the context requires, its wholly-owned subsidiaries.
TABLE OF
CONTENTS
I I Highlights
IV Message from Robert Pace
V Message from JJ Ruest
V I I I CN100 – A Moving Celebration
X Delivering Responsibly for
a Sustainable Future
XIV Delivering Superior Service
for Our Customers
X V I I Growth through Operational
Supply Chain Leadership
X X Taking Precision Scheduled
Railroading to New Heights
X XI I Board of Directors
X XI I I Select Senior Officers
of the Company
X XIV Shareholder and Investor
Information
F I N A N C I A L S E C T I O N
1 Selected Railroad
Statistics – unaudited
2 Management’s Discussion
and Analysis
54 Management’s Report on Internal
Control over Financial Reporting
55 Report of Independent Registered
Public Accounting Firm
58 Consolidated Financial Statements
62 Notes to the Consolidated
Financial Statements
C N 2 0 1 9 A N N U A L R E P O R T I
p h o t o a b ov e b y:
Tim Stevens, CN Lubricator Maintainer
Hinton, AB
c ov e r p h o t o b y:
Matthew Waller, CN Locomotive Engineer
Jasper, AB
HIGHLIGHTS
Fort Nelson
Hay River
Prince Rupert
Fort McMurray
Reinvesting in the Company
Prince George
$3.9B
CAPITAL
EXPENDITURES
We completed a record capital expenditure program to increase capacity, particularly
in our Western Region, supporting our ability to grow at low incremental cost.
Edmonton
Kamloops
Calgary
Vancouver
Saskatoon
Slower revenue growth
$14.9B
REVENUES
2019 revenues rose by $0.6 billion, or 4%, compared to 2018,
which was less than expected due to slower economic growth.
Stable earnings
$5.83
DILUTED
EPS
While diluted earnings per share decreased 1% compared
to 2018, adjusted diluted EPS1 increased 5%.
$5.80 ADJUSTED
DILUTED
EPS1
Improved fuel efficiency
48K
TONS OF CARBON
EMISSIONS SAVED
2019 fuel efficiency (GTMs per US gallon of fuel consumed) improved 1%, saving
approximately 48,000 tons of carbon emissions, and maintaining CN’s fuel
efficiency leadership versus the average of Class I North American railways.
1 See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure.
I I C N 2 0 1 9 A N N U A L R E P O R T
Sept-Îles
Baie-Comeau
Matane
Moncton
Saint John
Halifax
Regina
Winnipeg
Hearst
Thunder Bay
Minneapolis/St. Paul
Duluth
Chippewa Falls
Stevens
Point
Arcadia
Fond du Lac
Sault
Ste. Marie
Green
Bay
Toronto
Sarnia
Detroit
Sioux City
Omaha
Joliet
Toledo
Chicago
Indianapolis
Decatur
East Peoria
Springfield
East St. Louis
Quebec
Montreal
Buffalo
Conneaut
Pittsburgh
Memphis
Jackson
Baton Rouge
Gulfport
Mobile
Pascagoula
New Orleans
Fort Nelson
Hay River
Prince Rupert
Fort McMurray
Prince George
Vancouver
Edmonton
Kamloops
Calgary
Saskatoon
Regina
Winnipeg
Hearst
Thunder Bay
Sept-Îles
Baie-Comeau
Matane
Quebec
Montreal
Moncton
Saint John
Halifax
Duluth
Chippewa Falls
Stevens
Point
Minneapolis/St. Paul
Sioux City
Omaha
Arcadia
Fond du Lac
Joliet
East Peoria
Springfield
East St. Louis
Sault
Ste. Marie
Green
Bay
Toronto
Sarnia
Detroit
Toledo
Chicago
Buffalo
Conneaut
Pittsburgh
Indianapolis
Decatur
Memphis
Jackson
Baton Rouge
Gulfport
Mobile
Pascagoula
New Orleans
CN main lines
Secondary and feeder lines
Shortline partners
Ports served by CN
C N 2 0 1 9 A N N U A L R E P O R T I I I
MESSAGE FROM
ROBERT PACE
I feel honoured to serve as Chair of the Board of our
magnificent Company, especially now during the
100th anniversary of its founding. Throughout this
special year, I’ve had the opportunity to celebrate
with thousands of people from coast to coast to coast.
C E L E B R AT I N G 1 0 0 Y E A R S O F S E RV I C E
S TR I V I N G FO R TH E H I G H E S T S TA N DA R DS
One of the most notable CN100 events for me was
participating in a citizenship ceremony for 11 new Canadians
in my hometown of Halifax, NS. The special event took place
aboard CN’s historic business car at Pier 1 in Halifax. I had the
opportunity to speak to the new citizens about CN’s history
and its connections to nation-building. CN was a big part
of transporting over one million immigrants from Pier 21 in
Halifax between 1925 and 1971. The ceremony was one of the
most memorable events I’ve attended in my years with CN.
Over the past 100 years, CN has become an iconic brand,
synonymous with innovation and operational excellence. Our
deep history of innovation includes CNR Radio, North America’s
first radio network, which later became the Canadian
Broadcasting Corporation. CN also founded Trans-Canada
Airlines, which is now Air Canada, and built telecom
infrastructure that is still in use today. Among CN’s many
operational innovations, we were the first North American
railroad to use diesel locomotives in mainline service and, many
years later, we pioneered Precision Scheduled Railroading.
Today, as we close off our CN100 celebrations, I am proud of
our legacy and very encouraged by what the future holds.
R E WA R D I N G O U R S H A R E H O L D E R S
On behalf of CN’s Board of Directors, I would like to thank our
shareholders and other stakeholders for their continued support.
In 2019, CN returned $3.2 billion to shareholders in the form
of dividends and share repurchases. I am pleased that CN’s
dividend has increased on average by 16% every year since our
IPO 25 years ago. CN has repurchased over $23 billion of shares
through normal course issuer bids since 2000. As a result of
another year of solid financial performance despite numerous
challenges in 2019, the Board approved a 7% increase in our
annual dividend for 2020, the 24th consecutive increase.
I V C N 2 0 1 9 A N N U A L R E P O R T
At CN, we believe an ethical business is a sustainable
business. That’s why we strive to continuously improve
our culture of integrity and ensure transparency in our
communications. CN’s business practices continue to be
recognized. In 2019, The Globe and Mail placed CN first in
the industrials group and seventh overall among Canadian
publicly traded companies for the quality of our governance
practices. CN was also ranked as one of Corporate Knights’
2020 Global 100 Most Sustainable Corporations in the World
and CN received Best in Sector – Industrials honours in
IR Magazine’s global ranking of investor relations excellence.
CN has been listed on the Dow Jones Sustainability World
Index for eight consecutive years. Additionally, we continue
to be a member of the FTSE4Good Index, Global Challenges
Index and Jantzi Social Index, among others.
To benefit from a broader range of perspectives and
experiences, CN is making strides to increase diversity
within the Company and on the Board, where 38% of our
directors are women. CN is the first transportation company
in Canada to receive the Progressive Aboriginal Relations
Bronze Level certification from the Canadian Council
for Aboriginal Business. We were also selected as one of
Canada’s Best Diversity Employers by The Globe and Mail.
I’m proud of the Company’s performance in 2019 and I feel
very optimistic as we move ONWARD, together.
Sincerely,
Robert Pace, d.comm., c.m.
Chair of the Board
MESSAGE FROM
JJ RUEST
2019 was a historic year for CN as we celebrated
100 years on the move. We’ve certainly come a long
way in the past century thanks to the support of
thousands of dedicated employees, customers, supply
chain partners, shareholders and other stakeholders.
D E M O N S T R AT I N G O U R
A B I L I T Y TO A DA P T
2019 was characterized by many challenges that
hampered expected revenue growth. The early part of the
year saw a prolonged period of very cold temperatures
in key segments of our network. Near the end of the year,
a strike by 3,200 conductors brought operations to a
virtual standstill for nine days. However, the main reason
for the slower revenue growth was a weakened economy
throughout the second half of 2019. The combination
of these factors led to lower overall volumes for the
Company. Despite this, I’m proud of how we pulled
together as ONE TEAM to remain an industry leader
and stay competitive. This speaks to the character and
strength of our remarkable team.
Overall, compared to 2018, 2019 revenues were up
$0.6 billion, or 4%, to a record $14.9 billion. Diluted
earnings per share stood at $5.83 and adjusted diluted
earnings per share1 increased 5% to $5.80. However, the
number of revenue ton miles (RTMs) delivered by CN was
down 3% due to the factors described above.
C N ’ S CO M P E T I T I V E A DVA N TAG E S
For many decades, our competitors were predominantly
other railways and other modes of transportation. Today,
we compete on a global stage as part of a complex and
integrated supply chain working as one across a variety of
logistics offerings to deliver our customers’ goods to their
customers and end markets.
Operating efficiently has long been one of the hallmarks
of CN’s success. Today, our focus goes beyond running
a railroad in the most efficient way possible. We work
hard to understand our customers’ end-to-end supply
chains, because we want to be a key factor in enabling
their success.
To be a supply chain leader requires sustained commitment
to building strong working relationships with customers
and supply chain partners such as ports, ocean carriers,
trucking companies, terminal operators and others. Through
partnerships, investments and a dedicated customer
mindset, CN is focused on enabling growth. Moreover, we
are driving innovation and deploying technologies that will
take Precision Scheduled Railroading to the next level by
creating new and better ways to deliver safe, reliable and
low-carbon transportation solutions.
C N 2 0 1 9 A N N U A L R E P O R T V
CN safely and
reliably moves the
North American
economy and
enables global
trade by helping
customers win
and communities
prosper.”
S A F E T Y I S A CO R E VA L U E AT C N
Safety continues to be an area of relentless focus for
our Company. Safety is the lens through which we make
decisions in all areas of our business, every day. However,
we can always do better. It is with a heavy heart that I
report the passing of our colleague Imraan Qamar, 27, who
was fatally injured on August 15, 2019, at MacMillan Yard
in Toronto, ON. Imraan had just started his career at CN,
having joined as a conductor trainee in June 2018 and
qualified as a conductor in December 2018. My thoughts
and prayers are with his family, friends and colleagues.
The loss of one member of the CN family deeply affects
us all. This tragic accident is a harsh reminder of how
unforgiving the railroad environment can be, and how
extremely important safety is. That’s why we must always
work to improve our safety culture.
One way we worked toward this in 2019 was by adopting
Life Critical Rules when operating alone, in teams, or as a
supervisor of others. These are the safety rules that, if not
precisely followed, can lead to death or serious injury. We
also continued to leverage recent advances in technology
to progress our safety performance. Drawing on innovations
from other industries, these cutting-edge technologies will
improve, for example, inspection reliability and preventative
maintenance. Technology has an important role to play
in the rail industry’s future, and CN is a pioneer in making
that happen.
V I C N 2 0 1 9 A N N U A L R E P O R T
AC H I E V I N G LO N G -T E R M G R OW T H
As part of the economic fabric of North America, we strive
to build on our position as a leading rail and multimodal
logistics company. Our supply chain expertise is helping us
to grow market share with our existing customers as well
as gain new customers. We also grow when we partner
with and invest in new businesses by bringing them into the
CN family. It allows us to offer new services to the market,
extend our reach up and down the supply chain and fill the
underutilized areas of our network.
A great example of this approach is our 2019 acquisition of
TransX, one of Canada’s oldest and largest transportation
companies. The acquisition positions us to strengthen our
intermodal business, expand capacity and foster additional
supply chain solutions to continue to create value for
customers. We also onboarded a strong entrepreneurial
management team with deep expertise in logistics,
operations, dispatch and the temperature-controlled
supply chain.
D E L I V E R I N G A S O N E T E A M
At the beginning of this message I mentioned the
exceptional character and strength of our remarkable
railroaders. Let me take a moment to acknowledge that
their work is what defines CN. Together, we redefine “the
art of the possible” every day by working toward a common
goal as ONE TEAM.
CN has a long and proud history of developing the best
team of railroaders in the business by attracting talent with
diverse industry backgrounds. In this way, we pay tribute
to our past of building a great company and contributing
to national prosperity. It is our people and their talent
who have made CN what it is today, and who continue to
differentiate us from our competitors.
2 02 0 O U T LO O K –
C AU T I O U S LY O P T I M I S T I C
2020 represents another special milestone for our Company
as we celebrate 25 years since our IPO. But, CN’s future is
what I’m the most passionate about. CN’s strategic agenda
is focused on enabling long-term profitable growth, and
that means being part of the solutions that enable our
partners to continue expanding.
In 2020, the economy is expected to remain uncertain. As
a result, CN will continue to focus on cost control and asset
utilization to align resources with changing demand. Our
capital program is reduced to $3.0 billion, following two
years of record capacity investments. Importantly, we will
maintain our attention on where the economy is going. That
means an even greater emphasis on the consumer market
and intermodal shipments, and continued focus on network
capacity in our fast-growing Western Region. In addition, we
continue to keep a close eye on potential acquisitions with
a strong focus on opportunities that support incremental
volume on our core rail franchise.
We are not waiting for the economy to bring the freight to
us. We will continue to go after the freight in collaboration
with our customers, supply chain partners and other
stakeholders. Together, we will enable economic prosperity
by providing reliable, competitive and carbon-efficient
transportation solutions.
CN’s President and CEO, JJ Ruest, at Thornton Yard in Vancouver, BC.
Photo by Stuart McCall/Alpha Presse
As we look to the next century, we are raising our game
to deliver for a sustainable future, leading the industry to
make a meaningful difference for our people, our customers
and the many communities where we operate. Rail has
tremendous potential to reduce the environmental impact
of transportation. As a mover of the economy, CN is
committed to playing a key role in the transition to a lower
carbon economy.
I’m proud that CN is internationally regarded as one of the
best-performing transportation companies. To maintain
this enviable position, transformational change is underway
within our Company. With our focus on diversifying our
talent pool, the introduction of new technologies, and
the integration of new companies into our supply chain
approach, we are well on our way to achieving our mission
of connecting customers with the markets that drive their
business success. Let’s move ONWARD, together.
Sincerely,
JJ Ruest
President and Chief Executive Officer
1 See the section entitled Adjusted performance measures in the MD&A for an explanation of this non-GAAP measure.
C N 2 0 1 9 A N N U A L R E P O R T V I I
1
2
CN100 –
A Moving
Celebration
To celebrate our 100th birthday,
CN is going on tour! Stopping in cities
across North America, CN100 – A
Moving Celebration is a travelling
exploration of CN’s centenary. It’s a
great way for CN’s extended family
and friends — employees, pensioners,
customers and the communities we
serve from coast to coast to coast — to
look back on the miles we have covered
together and imagine what lies ahead. A
day at the celebration site has something
for everyone: historical exhibits, shows,
music, food and activities.
Join us in celebrating 100 years on the move!
cn.ca/cn100
CN100
1 Quebec City, QC
2 Edmonton, AB
3 Calgary, AB
4 Vancouver, BC
5 Halifax, NS
6 Winnipeg, MB
7 Regina, SK
V I I I C N 2 0 1 9 A N N U A L R E P O R T
4
5
3
6
7
C N 2 0 1 9 A N N U A L R E P O R T I X
DELIVERING RESPONSIBLY
FOR A SUSTAINABLE FUTURE
Delivering Responsibly is at the heart of how CN is building for
a sustainable future. It means moving customer goods safely
and efficiently, being environmentally responsible, attracting
and developing the best railroaders, helping build safer, stronger
communities, while adhering to the highest ethical standards. CN is
proud to be recognized for its efforts to build a more sustainable future.
Five principles anchor our sustainability commitment:
Safety, Environment, People, Community and Governance.
Safety
Governance
Environment
Community
People
X C N 2 0 1 9 A N N U A L R E P O R T
p h o t o b y:
Pascale Simard/Alpha Presse
Northern Quebec
Our goal is to reduce serious
injuries and fatalities to
zero
at CN.
S A F E T Y I S A CO R E VA L U E
Absolutely nothing is more important to us than
running a safe railroad, because a safe day is the only
acceptable kind of day at CN. Our goal remains to be
the safest railroad in North America by establishing
an unwavering safety culture and implementing a
management system designed to minimize risk.
We are also leveraging recent advances in technology
to improve our safety performance.
Safety must permeate every role in the Company and
be the lens through which every priority is set and
decision made. By means of our company-wide safety
culture, where no one will compromise on safety, we
strive to safeguard our employees, assets, customers’
goods, neighbouring communities, and the environment.
Together, we look out for each other because every day
at CN must be a safe day.
Car Mechanic Terry Rioux (left) and Carman Chance Sterner
use a new mobile application for car repair billing.
Prince Rupert, BC
Photo by Pascale Simard/Alpha Presse
FRA Train Accident Ratio
accidents per million train miles
TSB Train Accident Ratio
accidents per million train miles
FRA Personal Injury Ratio
injuries per 200,000 person hours
6.95
7.01
5.92
2.02
2.11
1.83
1.83
1.81
1.91
2017
2018
2019
2017
2018
2019
2017
2018
2019
The FRA train accident ratio includes
only derailments or collisions in
excess of US$10,700 (C$14,500).
The TSB accident ratio includes
all accidents and improved
15.5% in 2019 vs. 2018.
The personal injury ratio was up
5.5% in 2019 compared to 2018.
C N 2 0 1 9 A N N U A L R E P O R T X I
TA K I N G AC T I O N
TO P R OT E C T T H E
E N V I R O N M E N T
For CN, an environmentally
sustainable future means thinking and
acting in the interest of generations to
come. We are working to build a strong
environmental legacy of leadership by
means of carbon-efficient operations,
conserving resources, and protecting
and restoring the rich and diverse
natural ecosystems through which our
network passes.
Our goal is to conduct our operations
with minimal environmental impact
while providing cleaner, more
sustainable transportation services
to our customers. In fact, rail is four
to five times more fuel efficient than
trucks and has tremendous potential
to reduce the environmental impact of
CN is the fuel-efficiency leader in
the North American rail industry,
consuming approximately
15% less fuel per
gross ton mile
than the industry average.
transportation and play a key role in
the climate change solution. Over the
past 25 years, we have reduced our
locomotive emission intensity by 39%,
avoiding 45 million tons of carbon
compared to shipping by truck.
We are committed to advancing the
circular economy in all aspects of our
operations. Working collaboratively
by engaging employees, customers
and suppliers, we continue to find
innovative ways to optimize the use of
resources and divert approximately
90% of waste from landfills
through our reduce-reuse-recycle-
renew programs.
WO R K I N G A S O N E T E A M
CN’s ONE TEAM approach fosters
a safe, supportive and diverse work
environment where employees can
grow to their full potential and be
recognized for their contributions
to our success. In an increasingly
complex global marketplace, we
recognize the importance of working
as ONE TEAM to make us a stronger
and more resilient company. Adopting
a ONE TEAM mindset means we are
open to learning from each other and
drawing on talent from diverse groups,
cultures, industries and experiences so
we can grow to be more than the sum
of our parts. A diverse and respectful
workforce enables us to better
understand and respond to the needs
of our customers and the communities
we serve, access a larger talent pool,
and increase the effectiveness of our
decision-making through a wider
range of perspectives, experiences
and sensibilities.
One of CN’s newly hired conductors, Alysia Davis, with her trainer,
Superintendent Joseph Brooks, in Harrison Yard, TN.
Photo by Gary Walpole/Alpha Presse
X I I C N 2 0 1 9 A N N U A L R E P O R T
B U I L D I N G S A F E R ,
S T R O N G E R CO M M U N I T I E S
For over 100 years, the employees of CN have been proud
to be an important part of the many communities across
our 20,000-mile North American network. As neighbours,
we are committed to building safer, stronger, more
resilient communities together by investing in community
development, creating positive socio-economic benefits,
and ensuring open, transparent lines of communication.
To strengthen community relations and increase the impact
of our community investments, CN established Community
Boards across the network. The Boards are comprised
of local community leaders who provide input on CN’s
community investments in the region. We want you to be
proud to have CN in your communities.
As we do every year, in 2019, CN employees brought
critical rail safety information and training to thousands
of municipal officials and emergency responders. During
our 2019 Rail Safety Week campaign, which aimed to
educate communities about rail crossing safety, CN police
officers and other employees conducted over 250 activities
at schools, community centres, railway stations and level
crossings across Canada and the United States.
In 2019, to celebrate CN’s 100th anniversary and
in conjunction with our travelling CN100 – A Moving
Celebration tour, CN and Tree Canada partnered to plant
a Legacy Forest in nine cities from coast to coast, each
consisting of 100 mature trees. Additional Legacy Forests
will be planted in other cities in 2020. Overall, in 2019, CN
planted almost 135,000 trees in communities along our
rail network. Since 2012, we have planted over two million
trees, making CN one of the leading private non-forestry
company tree planters in Canada.
A 2019 Rail Safety Week participant signs the Rail Safety Pledge.
Amite, LA
Photo by Scott Saltzman/Alpha Presse
JJ Ruest and CN executives rang the closing bell at the Toronto
Stock Exchange on June 4, 2019 in honour of CN’s 100th anniversary.
Toronto, ON
Photo by Geoff Parkin-GP Photo
CO M M I T T E D TO G O O D
CO R P O R AT E G OV E R N A N C E
As a Canadian reporting issuer with securities listed on the
Toronto Stock Exchange (TSX) and the New York Stock
Exchange (NYSE), we ensure our corporate governance
practices comply with the highest standards and rules
adopted by the Canadian Securities Administrators,
applicable provisions of the U.S. Sarbanes-Oxley Act of
2002 and related rules of the U.S. Securities and Exchange
Commission. We are exempted from complying with many
of the NYSE corporate governance rules, provided that we
comply with Canadian governance requirements. Except
as summarized on our website at www.cn.ca/governance,
our governance practices comply with the NYSE corporate
governance rules in all significant respects.
Consistent with the belief that ethical conduct goes beyond
compliance and resides in a solid governance culture, we
publish and enforce CN’s Corporate Governance Manual, Code
of Business Conduct and Anti-Corruption Policy. Because it
is important that any potential wrongdoings be reported,
CN has adopted several methods for employees and third
parties to anonymously report accounting, auditing and
other concerns.
CN is committed to diversity and inclusion, not only in
principle, but also in practice. CN believes that a diverse
board benefits from a broader range of perspectives and
relevant experience. The Board-approved Diversity Policy with
respect to director and executive positions considers various
diverse groups, including gender, when recommending
director nominees. The Board has a target of at least
one-third representation by women, which it has exceeded.
The Board aspires to attain, by the end of 2022, a Board
composition in which at least forty percent (40%) of
directors are from a broader range of diverse groups.
We are a proud signatory to the Catalyst Accord 2022.
C N 2 0 1 9 A N N U A L R E P O R T X I I I
DELIVERING SUPERIOR
SERVICE FOR OUR
CUSTOMERS
Our supply chain leadership brings value to our customers as we
partner with them to more successfully serve their customers. We
proactively go the extra mile to help our customers and supply chain
partners reach farther, open new markets, and win in the global
marketplace — because, when our customers win, CN wins, too.
Since 2015,
two-thirds
of grain elevators
being built in the
Canadian Prairies are
being built exclusively
on CN’s network.
T H E T R A N S LOA D S O L U T I O N
For companies not located on a rail spur, but want to take
advantage of the economics and carbon efficiency of rail,
transload is the solution. In November 2019, CN “spotted”
the first railcars of our new transload partnership with
FLASH Trucking in Green Bay, WI, boosting the economic
potential of all northern Wisconsin.
H E L P I N G FA R M E R S M OV E
R E CO R D G R A I N C R O P
CN’s team of railroaders moved a record 27.8 million
metric tons (MMT) of Western Canadian grain during
the 2018–2019 crop year, 1.5 MMT (or 6%) more than the
previous record. CN also moved over 1 MMT of grain in
containers out of Western Canada.
X I V C N 2 0 1 9 A N N U A L R E P O R T
p h o t o b y:
Pascale Simard/Alpha Presse
Spruce Grove, AB
Photo by Lloyd Sutton/Alpha Presse
Calgary Logistics Park, Calgary, AB
E N S U R I N G S A F E T Y O F
T E M P E R AT U R E - S E N S I T I V E G O O D S
E X T E N D I N G I N T E R M O DA L
AG R E E M E N T S W I T H O C E A N C A R R I E R S
CN’s commitment to the efficient movement of
temperature-controlled goods and our remote monitoring
artificial intelligence (AI) technology are key to food safety.
Each CargoCool container offers the power of almost
100 refrigerators and, through ReeferTrak, our dedicated
team has real-time visibility of the temperature inside the
box, ensuring that perishable cargo is always at the correct
temperature. In 2019, we added 300 new reefers to our fleet
to handle growth opportunities and develop new markets.
With the addition of the TransX and H&R fleets, CN now has
over 2,100 reefers running throughout North America.
In addition to our domestic reefer fleet, we have a diversified
fleet of assets to support the movement of international
reefer containers for ocean carriers. CN has 94 IntelliGEN
powerpack gensets and 150 clip-on gensets, which provide
consistent, uninterrupted power supply for international
refrigerated products while moving on CN’s network.
C N A N D G M R E N E W T H E I R
LO N G - S TA N D I N G R E L AT I O N S H I P
In 2019, CN signed a new multiyear agreement with
General Motors (GM) for the transport of finished vehicles
and parts. GM is the first customer to use our new
Autoport facility in Vancouver. Our latest Autoport facility
in New Richmond, WI, will be completed in Q4 2020
with GM operations commencing in 2021. Both facilities
will provide quicker vehicle deliveries for GM and its
customers throughout the northern U.S. Midwest and
British Columbia.
Ocean carriers value CN’s network reach, excellence in
supply chain logistics and focus on growth. For example, in
September 2019, CN and Evergreen extended their 27-year
partnership, with Evergreen calling at the CN-served ports
of Vancouver, Prince Rupert and Halifax. Also, in the same
month, COSCO Shipping chose CN to be the exclusive
rail provider for their cargo at the ports of Vancouver,
Prince Rupert, Montreal and Halifax to all CN destinations.
Finally, with a global reach to over 100 countries, ZIM
Integrated Shipping Services partnered with the 2M Alliance
in March 2019 to add Prince Rupert as one of their
port destinations.
Photo by Lloyd Sutton/Alpha Presse
Port of Vancouver, Vancouver, BC
C N 2 0 1 9 A N N U A L R E P O R T X V
CN provided
training to
more than
200
customers
in 2019 at our
national training
centres in Manitoba
and Illinois.
AltaGas Ridley Island Propane Export Terminal
Port of Prince Rupert, Prince Rupert, BC
Photo by Jan Vozenilek
E N A B L I N G N E W
E X P O R T S T H R O U G H
P R I N C E R U P E R T
O P E N I N G O U R
D O O R S TO L E A R N I N G
E X P E R I E N C E S
As part of our growth strategy, CN’s
capital investments in Western
Canada are creating additional
capacity, allowing us to increase
operations at the Port of Prince Rupert.
For example, in April 2019, CN
delivered the first unit train of propane
from production facilities northwest of
Edmonton, AB, for export via the new
AltaGas Ridley Island Propane Export
Terminal. In August 2019, Ray-Mont
Logistics completed the first phase of
its innovative new multi-million-dollar
facility for bagging plastic pellets
produced in Alberta into containers for
export out of the Port of Prince Rupert.
CN has two modern training facilities:
the Claude Mongeau National
Training Centre in Winnipeg, MB, and
the CN Campus in Homewood, IL.
Thanks to the CN Campus Partnership
Program, CN has provided hundreds
of customers with a set of safety-
focused learning experiences that help
instill a safety mindset and ensure
safer operations throughout the rail
supply chain.
R ECO G N I Z I N G
C U S TO M E R S A N D S U P P LY
C H A I N PA R T N E R S
FO R S U S TA I N A B I LIT Y
L E A D E R S H I P
The CN EcoConnexions Partnership
Program celebrates companies who
are committed to building a more
sustainable future by reducing their
environmental footprint and being
part of the climate solution. On behalf
of 45 EcoConnexions partners and
in collaboration with Tree Canada,
we planted 120,000 trees in 2019 in
Canada and the U.S.
Volunteers at a CN100 tree-planting event.
Winnipeg, MB
Photo by Tree Canada
X V I C N 2 0 1 9 A N N U A L R E P O R T
GROWTH THROUGH
OPERATIONAL SUPPLY
CHAIN LEADERSHIP
At CN, we are committed to creating the network of the future by
building the infrastructure, relationships, technologies and expertise
that enable us to make those supply chains as safe, efficient, and reliable
as possible. We showcase CN’s leadership in the industry by continuing
to leverage our unique network to grow with existing customers, with
new customers, and by partnering with and investing in new businesses.
We have a demonstrated ability to nimbly weather economic downturns
when they inevitably occur.
P R I N C E R U P E R T CO N T I N U E S
R A P I D G R OW T H
The Port of Prince Rupert, which is served exclusively by
CN, is currently operating close to its maximum capacity
of 1.35 million twenty-foot equivalent units (TEUs) as a
result of its status as the fastest West Coast gateway
into North America. In fact, 11 steamship lines, including
all the top five companies in the world, now leverage
Prince Rupert’s one-to-two-day sailing advantage
to/from Asia. The port also benefits from a wide range of
export opportunities to improve round-trip economics for
steamship lines and a close partnership with rail operations
that drive efficiency and premium customer service.
Our supply chain partners at the Port of Prince Rupert are
planning public/private investments with the Government
of Canada of over $1 billion. These include the completion
of Pembina’s liquefied petroleum gas export terminal with
a capacity of 25,000 barrels per day, which is expected to
begin exports in 2020, with the potential to add another
15,000 barrels per day in 2023. DP World’s Fairview
container terminal is expected to increase capacity to
1.8 million TEUs by 2022. Vopak Pacific Canada plans to
scale up its bulk liquids terminal from 4 MMT to 12 MMT,
with Phase 1 to be completed in 2022. Ray-Mont Logistics
and Export Logistics both plan new transload facilities for
agricultural, plastic resin, dry bulk, and forest products.
Supporting this continued growth is over $350 million in
joint infrastructure investment by CN, the Prince Rupert
Port Authority and the Government of Canada. These
include bridge expansion, double track and new
siding projects.
p h o t o b y:
Jan Vozenilek
Prince Rupert, BC
C N 2 0 1 9 A N N U A L R E P O R T X V I I
with Teck to increase shipments of steelmaking coal
from Teck’s four B.C. operations through an expanded
Neptune Terminal as well as the recently privatized bulk
terminal in Prince Rupert. G3 is building a new grain terminal
with a capacity of 8 MMT, which will start operations in
mid-2020. GrainsConnect and P&H expect to add 3.5 MMT
of capacity at the Fraser Surrey grain terminal by the end of
2020. Fibreco, Kinder Morgan, Cargill and Richardson are
also increasing their grain-handling capacities.
To improve rail access to accommodate the expected
growth, CN, the Port of Vancouver and the Government of
Canada signed an agreement in 2019 to jointly fund over
$400 million in rail investments to double sections of track
and improve tunnel ventilation.
E M U L AT I N G P R I N C E R U P E R T
M O D E L O N E A S T COA S T
CN’s Canadian East Coast port strategy to leverage our
underutilized eastern network is to emulate the success
of our Prince Rupert model. Similar advantages exist at
Eastern Canadian ports, which aim to capture growth
from ultra-large container vessels. Together, we are
developing competitive gateways for Asian, European
and Mediterranean cargo with end-to-end solutions to
Eastern Canada and the U.S. Midwest. To this end, CN is
working closely with PSA, a leading global port terminal
operator and the new owner of the terminal at the Port of
Halifax. Over the past 10 years, the terminal has invested
$250 million to build longer and deeper piers as well as
upgrade gates and marshalling areas. With the addition of
a fifth Super Post-Panamax ship-to-shore crane scheduled
to be in service by June 2020, PSA Halifax will be able to
handle today’s largest vessels.
Another new port operator in the region is Hutchison Ports,
the world’s leading port network. CN, Hutchison and the
Port of Quebec signed a joint venture agreement in 2019
to work together to open a new, state-of-the-art container
terminal that is set to become a cornerstone of this
deep-water, year-round port. The new terminal will have
a capacity of 700,000 TEUs and will be exclusively served
by CN. The opening is scheduled for 2024.
Westshore Terminals
Deltaport, BC
Photo by William Jans/
Vancouver Fraser
Port Authority
I N V E S T I N G TO S U P P O R T
G R OW T H I N VA N CO U V E R
The partners we serve at the Port of Vancouver are showing
confidence in our supply chain focus and plan to invest
$1 billion in the next few years to expand their capacity.
In 2020, Global Container Terminals Canada plans to
add 215,000 TEUs at Vanterm and another 500,000 TEUs
at Deltaport, bringing the capacity at these intermodal
terminals to 1.1 million and 2.4 million TEUs, respectively.
DP World has begun a project to more than double
capacity at Centerm to 1.5 million TEUs, which is scheduled
for completion by early 2022. Neptune Terminal has
almost doubled its potash capacity from 6 million metric
tons (MMT) to 11 MMT and plans to increase its capacity to
handle coal from 12.2 MMT to more than 18.5 MMT by 2021.
This dovetails perfectly with CN’s long-term agreement
X V I I I C N 2 0 1 9 A N N U A L R E P O R T
CN has
23
strategically located
intermodal terminals,
more than double that of
our nearest competitor.
B U I L D I N G O N O U R
ACQ U I S I T I O N
T R AC K R E CO R D
CN continues to pursue inorganic
growth opportunities that help
our customers get their products
to market more efficiently, extend
our reach, and increase volume
on our network. In 2019, CN made
three acquisitions that fit perfectly
with this strategic focus. The
acquisition of Manitoba-based
TransX positions CN to strengthen
its intermodal business and allows
the Company to expand capacity
and foster additional supply chain
solutions. We are also expanding our
North American rail intermodal supply
chain with the acquisition of Alberta-
based H&R Transport’s intermodal
temperature-controlled transportation
division. Finally, pending regulatory
review, CN acquired the Massena
rail line from CSX, which represents
more than 220 miles of track between
Valleyfield, QC, and Woodard, NY.
Photo by TransX
Winnipeg, MB
E X PA N D I N G O U R
U N I Q U E I N T E R M O DA L
N E T WO R K
CN’s intermodal business continues
to grow due in part to the success
of our supply chain collaboration
and consistent service that help
our partners compete in a global
environment. For example, CN’s
full membership in the Equipment
Management Pool (EMP) since
March 2019 is reducing empty
container movements and extending
our reach. As well, since August 2019,
CN and CSX are offering a new
intermodal service between CN’s
Greater Montreal and Southern
Ontario markets, and the CSX-served
ports of Philadelphia, New York and
New Jersey.
We are also investing in our inland
terminals to accommodate greater
anticipated demand in key consumer
markets. These include major
investments in Southern Ontario
where we are planning to build a
new $250-million logistics hub in
Milton. CN also welcomed Canada’s
first privately operated intermodal
terminal located in the Chuka Creek
Business Park in Regina, SK,
exclusively served by CN, which
opened in November 2019.
C N 2 0 1 9 A N N U A L R E P O R T X I X
TAKING PRECISION
SCHEDULED RAILROADING
TO NEW HEIGHTS
CN pioneered Precision Scheduled Railroading (PSR) and our vision
is to create the network of the future by becoming the first railroad
to take PSR to the next level using advanced information technology.
The following cost-effective initiatives are expected to improve safety,
reliability and customer service.
P O S I T I V E T R A I N CO N T R O L ( P TC)
AUTO MATE D I N S PEC TIO N PO RTAL S ( AI Ps)
PTC is an innovative safety technology system we are
adding across our U.S. network. PTC is designed to prevent
certain accidents resulting from human error. The system
provides an added level of operational safety by initiating
a full brake application to stop a train in the unlikely
event that the crew is unable to or does not act. It is the
largest technology program ever deployed by CN and is
a major step toward safer operations. In November 2019,
CN began PTC operation on all required subdivisions,
13 months ahead of the congressionally mandated deadline
of December 31, 2020. We continue to work with our
Class I, short line and passenger rail partners to ensure
interoperability throughout the industry.
High-resolution imaging hardware coupled with powerful
machine learning software are changing how we inspect
our fleet. Our new AIPs feature ultra-high-definition
panoramic cameras and infrared lighting that capture a
360° view of a train as it travels at track speed through
the portal. The AIPs increase the frequency and quality of
inspections and reduce the need for slow roll-by inspections.
Our AIPs won a 2019 Rail Safety Award from the Railway
Association of Canada and a Digital Transformation Award
at the 2019 ICMG Architecture Awards. The first seven AIPs
are currently in operation, with more development expected
over the next few years.
X X C N 2 0 1 9 A N N U A L R E P O R T
p h o t o b y:
Pascale Simard/Alpha Presse
Automated inspection portal
Winnipeg, MB
AU TO N O M O U S
T R AC K I N S P E C T I O N
P R O G R A M ( AT I P)
With innovation and safety in mind,
CN is putting powerful sensor and AI
technology into specially equipped
automated railcars used during
revenue train service to inspect our
tracks at normal train speed. This
cutting-edge technology will reduce
the number of slow-speed inspection
vehicles on the tracks, unlock capacity
and improve service reliability by
reducing track disruptions. In addition,
it will increase inspection frequency
and quality, and provide more
accurate preventative maintenance
data. We currently have eight ATIP
railcars in service and plan to add
two more in 2020, which together will
provide 100% core mainline coverage.
ATIP railcar
Oshkosh, WI
Carman Josh Thomson-Kylie inspects a wheel in Halifax, NS.
Photo by Dan Callis/Alpha Presse
S M A R T N E T WO R K
CN is developing and systematically
deploying an integrated digital
scenario analysis and simulation
tool to enhance capacity
planning. The tool simulates train
movements to improve insight on
network capacity, cost and fluidity.
Stress testing scenario analysis will
help identify options/trade-offs to
handle anticipated volumes and
identify specific pinch points. This is
particularly important given the long
lead times to add capacity, including
infrastructure construction, crews
and locomotives.
E N T E R P R I S E
AU TO M AT I O N
CN is building a digitally nimble
organization by automating
or eliminating labour-intensive
and low-value repetitive tasks.
CN’s Information and Technology
team is leveraging a variety of scalable
and repeatable technological tools,
including robotic process automation
and smart data capture, to enable
employees to focus on value-added
tasks at low incremental cost.
H A N D H E L D T EC H N O LO GY
CN is providing employees with
next-generation smartphones and
tablets that digitize manual processes,
increase safety, improve information
flow and accuracy, and drive
productivity. This initiative is also a big
step towards paperless operations and
reduces our environmental footprint.
CN currently has
11,000
mobile devices
deployed to Operations
employees, with
more devices being
introduced in 2020.
C N 2 0 1 9 A N N U A L R E P O R T X X I
BOARD OF
DIRECTORS
t o p r o w :
Gordon Giffin, Shauneen Bruder, Denis Losier, Kevin Lynch,
Donald Carty, James O’Connor, Julie Godin, Robert Phillips
b o t t o m r o w :
Edith Holiday, Robert Pace, Maureen Kempston Darkes,
Jean-Jacques Ruest, Laura Stein
Robert Pace, d.comm., c.m.
Chair of the Board
Canadian National Railway Company
President and Chief Executive Officer
The Pace Group
committees: 3, 4*, 5, 7
Jean-Jacques Ruest
President and Chief Executive Officer
Canadian National Railway Company
committees: 4, 7
Shauneen Bruder
Retired Executive
Vice-President, Operations
Royal Bank of Canada
committees: 2, 4, 5, 6, 7
C O M M I T T E E S :
1 Audit
2 Finance
3 Corporate governance
and nominating
4 Donations and sponsorships
5 Environment, safety and security
6 Human resources and compensation
7 Strategic planning
8 Pension and investment
* Denotes chair of the committee
X X I I C N 2 0 1 9 A N N U A L R E P O R T
Donald J. Carty, o.c., ll.d.
Retired Chairman and
Chief Executive Officer
American Airlines
committees: 1*, 5, 6, 7, 8
Ambassador Gordon D. Giffin
Partner
Dentons US LLP
committees: 3, 5, 7, 8
Julie Godin
Co-Chair of the Board, Executive
Vice-President, Strategic Planning
and Corporate Development
CGI Inc.
committees: 2, 3, 6, 7, 8
Edith E. Holiday
Former General Counsel,
United States Treasury Department
and Secretary of the Cabinet
The White House
committees: 1, 2, 7, 8*
V. Maureen Kempston
Darkes, o.c., d.comm., ll.d.
Retired Group Vice-President
General Motors Corporation
and President GM Latin America,
Africa and Middle East
committees: 1, 2, 3, 7, 8
The Honourable Denis Losier,
p.c., ll.d., c.m.
Retired President and Chief
Executive Officer
Assumption Life
committees: 3*, 4, 7, 8
The Honourable Kevin G. Lynch,
p.c., o.c., ph.d., ll.d.
Vice-Chair
BMO Financial Group
committees: 1, 3, 6*, 7, 8
James E. O’Connor
Retired Chairman and
Chief Executive Officer
Republic Services, Inc.
committees: 1, 2, 4, 5, 7*
Robert L. Phillips
President
R.L. Phillips Investments Inc.
committees: 2*, 3, 5, 6, 7
Laura Stein
Executive Vice-President, General
Counsel & Corporate Affairs
The Clorox Company
committees: 1, 2, 5*, 6, 7
SELECT SENIOR OFFICERS
OF THE COMPANY
As at December 31, 2019
Jean-Jacques Ruest
President and
Chief Executive Officer
Ghislain Houle
Executive Vice-President
and Chief Financial Officer
Robert Reilly
Executive Vice-President, Chief
Operating Officer and Interim Chief
Information and Technology Officer
Sean Finn
Executive Vice-President Corporate
Services and Chief Legal Officer
James Cairns
Senior Vice-President
Rail Centric Supply Chain
Dorothea Klein
Senior Vice-President and
Chief Human Resources Officer
Doug MacDonald
Senior Vice-President
Information and Technology
Keith Reardon
Senior Vice-President
Consumer Product Supply Chain
Doug Ryhorchuk
Senior Vice-President
Network Operations
Janet Drysdale
Vice-President
Financial Planning
Marlene Puffer
President and Chief Executive Officer
CN Investment Division
Paul Butcher
Vice-President
Investor Relations
C N 2 0 1 9 A N N U A L R E P O R T X X I I I
SHAREHOLDER AND
INVESTOR INFORMATION
Annual meeting
Shareholder services
The annual meeting of shareholders will be held on
April 28, 2020.
Please refer to www.cn.ca for meeting details.
Shareholders having inquiries concerning their shares,
wishing to obtain information about CN, or to receive
dividends by direct deposit or in U.S. dollars may obtain
detailed information by communicating with:
Annual information form
The annual information form
may be obtained by writing to:
The Corporate Secretary
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, QC, Canada H3B 2M9
It is also available on CN’s website (www.cn.ca).
Transfer agent and registrar
Computershare Trust Company of Canada
Offices in Canada:
Montreal, Quebec
Toronto, Ontario
Calgary, Alberta
Vancouver, British Columbia
Telephone: 1-800-564-6253
www.investorcentre.com
Co-transfer agent and co-registrar
Computershare Trust Company N.A.
Att: Stock Transfer Department
Computershare Trust Company of Canada
Shareholder Services
100 University Avenue, 8th Floor
Toronto, ON, Canada M5J 2Y1
Telephone: 1-800-564-6253
www.investorcentre.com
Stock exchanges
CN common shares are listed on the
Toronto and New York stock exchanges.
Ticker symbols:
CNR Toronto Stock Exchange
CNI New York Stock Exchange
Investor relations
Paul Butcher
Vice-President, Investor Relations
Telephone: 514-399-0052
Head office
Canadian National Railway Company
935 de La Gauchetière Street West
Montreal, QC, Canada H3B 2M9
Overnight Mail Delivery:
462 South 4th Street, Louisville, KY, United States 40202
P.O. Box 8100
Montreal, QC, Canada H3C 3N4
Regular Mail Delivery: P.O. Box 505005,
Louisville, KY, United States 40233-5005
Telephone: 1-800-962-4284
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X X I V C N 2 0 1 9 A N N U A L R E P O R T
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Selected Railroad Statistics - unaudited
Financial measures
Key financial performance indicators (1)
Total revenues ($ millions)
Freight revenues ($ millions)
Operating income ($ millions)
Adjusted operating income ($ millions) (2)
Net income ($ millions)
Adjusted net income ($ millions) (2)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($) (2)
Free cash flow ($ millions) (3)
Gross property additions ($ millions)
Share repurchases ($ millions)
Dividends per share ($)
Financial position (1)
Total assets ($ millions)
Total liabilities ($ millions)
Shareholders' equity ($ millions)
Financial ratios
Operating ratio (%)
Adjusted operating ratio (%) (2)
Adjusted debt-to-adjusted EBITDA (times) (4)
Return on invested capital (ROIC) (%) (5)
Adjusted ROIC (%) (5)
Operational measures (6)
Statistical operating data
Gross ton miles (GTMs) (millions)
Revenue ton miles (RTMs) (millions)
Carloads (thousands)
Route miles (includes Canada and the U.S.)
Employees (end of year)
Employees (average for the year)
Key operating measures
Freight revenue per RTM (cents)
Freight revenue per carload ($)
GTMs per average number of employees (thousands)
Operating expenses per GTM (cents)
Labor and fringe benefits expense per GTM (cents)
Diesel fuel consumed (US gallons in millions)
Average fuel price ($/US gallon)
GTMs per US gallon of fuel consumed
Car velocity (car miles per day)
Through dwell (hours)
Through network train speed (miles per hour)
Locomotive utilization (trailing GTMs per total horsepower)
Safety indicators (7)
Injury frequency rate (per 200,000 person hours)
Accident rate (per million train miles)
2019
2018
2017
14,917
14,198
5,593
5,708
4,216
4,189
5.83
5.80
1,992
4,079
1,700
2.15
43,784
25,743
18,041
62.5
61.7
2.02
15.3
15.1
482,890
241,954
5,912
19,500
25,975
26,733
5.87
2,402
18,063
1.93
0.61
451.4
3.17
1,070
198
7.9
18.5
198
1.91
2.11
14,321
13,548
5,493
5,520
4,328
4,056
5.87
5.50
2,514
3,531
2,000
1.82
41,214
23,573
17,641
61.6
61.5
1.94
16.7
15.7
490,414
248,383
5,976
19,500
25,720
25,423
5.45
2,267
19,290
1.80
0.58
462.7
3.32
1,060
188
8.3
18.0
208
1.81
2.02
13,041
12,293
5,243
5,243
5,484
3,778
7.24
4.99
2,778
2,703
2,000
1.65
37,629
20,973
16,656
59.8
59.8
1.75
22.4
15.9
469,200
237,098
5,737
19,500
23,945
23,074
5.18
2,143
20,335
1.66
0.54
441.4
2.74
1,063
211
7.7
20.3
225
1.83
1.83
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Amounts expressed in Canadian dollars and prepared in accordance with United States generally accepted accountable principles (GAAP), unless otherwise noted.
See the section entitled Adjusted performance measures in the MD&A for an explanation of these non-GAAP measures.
See the section entitled Liquidity and capital resources - Free cash flow in the MD&A for an explanation of this non-GAAP measure.
See the section entitled Liquidity and capital resources - Adjusted debt-to-adjusted EBITDA multiple in the MD&A for an explanation of this non-GAAP measure.
See the section entitled Return on invested capital (ROIC) and adjusted ROIC in the MD&A for an explanation of these non-GAAP measures.
Statistical operating data, key operating measures and safety indicators are unaudited and based on estimated data available at such time and are subject to change as
more complete information becomes available. Definitions of these indicators are provided on CN's website, www.cn.ca/glossary.
Based on Federal Railroad Administration (FRA) reporting criteria.
CN | 2019 Annual Report 1
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Management's Discussion and Analysis
Contents
Business profile
Corporate organization
Strategy overview
Forward-looking statements
Financial outlook
Financial highlights
2019 compared to 2018
Non-GAAP measures
Adjusted performance measures
Constant currency
Return on invested capital (ROIC) and adjusted ROIC
Revenues
Operating expenses
Other income and expenses
2018 compared to 2017
Summary of quarterly financial data
Summary of fourth quarter 2019
Financial position
Liquidity and capital resources
Off balance sheet arrangements
Outstanding share data
Financial instruments
Recent accounting pronouncements
Critical accounting estimates
Business risks
Controls and procedures
2 CN | 2019 Annual Report
Management's Discussion and Analysis
This Management's Discussion and Analysis (MD&A) dated January 31, 2020, relates to the consolidated financial position and results of
operations of Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively "CN" or the "Company," and should
be read in conjunction with the Company's 2019 Annual Consolidated Financial Statements and Notes thereto. All financial information
reflected herein is expressed in Canadian dollars and prepared in accordance with United States generally accepted accounting principles
(GAAP), unless otherwise noted.
CN's common shares are listed on the Toronto and New York stock exchanges. Additional information about CN filed with Canadian
securities regulatory authorities and the United States Securities and Exchange Commission (SEC), including the Company's 2019 Annual
Information Form and Form 40-F, may be found online on SEDAR at www.sedar.com, on the SEC's website at www.sec.gov through EDGAR, and
on the Company's website at www.cn.ca in the Investors section. Printed copies of such documents may be obtained by contacting CN's
Corporate Secretary's Office.
Business profile
CN is engaged in the rail and related transportation business. CN's network of approximately 20,000 route miles of track spans Canada and
mid-America, uniquely connecting three coasts: the Atlantic, the Pacific and the Gulf of Mexico. CN's extensive network and efficient
connections to all Class I railroads provide CN customers access to Canada, the United States (U.S.) and Mexico. A true backbone of the
economy, CN handles over $250 billion worth of goods annually and carries over 300 million tons of cargo, serving exporters, importers,
retailers, farmers and manufacturers.
CN's freight revenues are derived from seven commodity groups representing a diversified and balanced portfolio of goods transported
between a wide range of origins and destinations. This product and geographic diversity better positions the Company to face economic
fluctuations and enhances its potential for growth opportunities. For the year ended December 31, 2019, CN's largest commodity group
accounted for 25% of total revenues. From a geographic standpoint, 16% of revenues relate to U.S. domestic traffic, 34% transborder traffic,
17% Canadian domestic traffic and 33% overseas traffic. The Company is the originating carrier for over 85%, and the originating and
terminating carrier for over 65%, of traffic moving along its network, which allows it both to capitalize on service advantages and build on
opportunities to efficiently use assets.
Corporate organization
The Company manages its rail operations in Canada and the U.S. as one business segment. Financial information reported at this level, such as
revenues, operating income and cash flow from operations, is used by the Company's corporate management in evaluating financial and
operational performance and allocating resources across CN's network. The Company's strategic initiatives are developed and managed
centrally by corporate management and are communicated to its regional activity centers (the Western Region and Eastern Region), whose role
is to manage the day-to-day service requirements of their respective territories, control direct costs incurred locally, and execute the strategy
and operating plan established by corporate management.
See Note 21 – Segmented information to the Company's 2019 Annual Consolidated Financial Statements for additional information on the
Company's corporate organization, as well as selected financial information by geographic area.
Strategy overview
CN's business strategy is anchored on the continuous pursuit of Operational and Service Excellence, an unwavering commitment to safety and
sustainability, and the development of a solid team of motivated and competent railroaders. CN's goal is to deliver valuable transportation
services for its customers and to grow the business at low incremental cost. A clear strategic agenda, driven by a commitment to innovation,
productivity, improving supply chains through collaboration, potential acquisitions and other opportunities, running trains safely, and minimizing
environmental impact, drives the Company's efforts to create value for customers. CN thereby creates value for its shareholders by striving for
sustainable financial performance through profitable top-line growth, adequate free cash flow and return on invested capital. CN is also
focused on returning value to shareholders through dividend payments and share repurchases.
CN's success and long-term economic viability depend on the presence of a supportive regulatory and policy environment that drives
investment and innovation. CN's success also depends on a stream of capital investments that supports its business strategy. These
investments cover a wide range of areas, from track infrastructure and rolling stock, to information and operating technologies, and other
CN | 2019 Annual Report 3
Management's Discussion and Analysis
equipment and assets that improve the safety, efficiency and reliability of CN's service offering. Investments in track infrastructure enhance the
productivity and integrity of the plant, increase the capacity and the fluidity of the network, promote service excellence and support growth at
low incremental cost. The acquisition of new locomotives and railcars generates several key benefits. New locomotives increase capacity, fuel
productivity and efficiency, and improve the reliability of service. Locomotives equipped with distributed power allow for greater productivity of
trains, particularly in cold weather, while improving train handling and safety. Targeted railcar acquisitions aim to tap growth opportunities,
complementing the fleet of privately owned railcars that traverse CN's network. CN is also investing in, and deploying, advanced technology. CN
pioneered scheduled railroading and its vision is to be the first railroad to take it to the next level, using advanced technology as a driver for
safety, customer and shareholder value.
Balancing "Operational and Service Excellence"
The basic driver of the Company's business is demand for reliable, efficient, and cost effective transportation for customers. As such, the
Company's focus is the pursuit of Operational and Service Excellence: striving to operate safely and efficiently while providing a high level of
service to customers.
CN operates with a mindset that drives cost efficiency and asset utilization. That mindset flows naturally from CN's Precision Railroading
model, which focuses on improving every process that affects delivery of customers' goods. It is a highly disciplined process whereby CN
handles individual rail shipments according to a specific trip plan and manages all aspects of railroad operations to meet customer
commitments efficiently and profitably. This calls for the relentless measurement of results and the use of such results to generate further
execution improvements in the service provided to customers. The Company's continuous search for efficiency is best captured in its
performance according to key operating metrics such as car velocity, through dwell, through network train speed and locomotive utilization. All
are at the center of a highly productive and fluid railroad operation, requiring daily engagement in the field. The Company works hard to run
more efficient trains, reduce dwell times at terminals and improve overall network velocity. The railroad is run based on a disciplined operating
methodology, executing with a sense of urgency and accountability. This philosophy is a key contributor to CN's operating ratio, earnings growth
and return on invested capital (ROIC).
CN understands the importance of balancing its drive for productivity with efforts to enhance customer service. The Company's efforts to
deliver Operational and Service Excellence are anchored on an end-to-end supply chain mindset, working closely with customers and supply
chain partners, as well as involving all relevant areas of the Company in the process. By fostering better end-to-end service performance and
encouraging all supply-chain players to continuously improve daily engagement, information sharing, problem solving, and execution, CN aims
to help customers achieve greater competitiveness in their own markets. Supply chain collaboration agreements with ports, terminal operators
and customers leverage key performance metrics that drive efficiencies across the entire supply chain.
The Company is strengthening its commitment to Operational and Service Excellence through a wide range of innovations anchored on its
continuous improvement philosophy. CN is building on its industry leadership in terms of fast and reliable hub-to-hub service by continuing to
improve across the range of customer touch points. The Company's major push in first-mile/last-mile service is focused on improving the
quality of customer interactions – developing a sharper outside-in perspective; better monitoring of traffic forecasts; higher and more
responsive car order fulfillment; and proactive customer communication at the local level.
CN's broad-based service innovations benefit customers and support the Company's goal to drive top-line growth. CN understands the
importance of being the best operator in the business, as well as being the best service innovator.
Delivering safely and responsibly
CN is committed to the safety of its employees, the communities in which it operates and the environment. Safety consciousness permeates
every aspect of CN's operations. The Company's long-term safety improvement is driven by continued significant investments in infrastructure,
rigorous safety processes and a focus on employee training and safety awareness. CN continues to strengthen its safety culture by investing
significantly in training, coaching, recognition and employee involvement initiatives.
CN's Safety Management Plan is the framework for putting safety at the center of its day-to-day operations. This proactive plan is designed
to minimize risk, drive continuous improvement in the reduction of injuries and accidents, and engage employees at all levels of the
organization. CN believes that the rail industry can enhance safety by working more closely with communities. Under CN's structured
Community Engagement program, the Company engages with municipal officers and their emergency responders in an effort to assist them in
their emergency response planning. In many cases, this outreach includes face-to-face meetings, during which CN discusses its comprehensive
safety programs; its safety performance; the nature, volume and economic importance of dangerous commodities it transports through their
communities; a review of emergency response planning; and arranging for training sessions for emergency responders. The outreach builds on
CN's involvement in the Transportation Community Awareness and Emergency Response (TRANSCAER®), through which the Company has
been working for many years to help communities in Canada and the U.S. understand the movement of hazardous materials and what is
required in the event of transportation incidents.
4 CN | 2019 Annual Report
Management's Discussion and Analysis
CN has been deepening its commitment to a sustainable operation for many years, and has made sustainability an integral part of its
business strategy. The best way in which CN can positively impact the environment is by continuously improving the efficiency of its operations,
and reducing its carbon footprint. As part of the Company's comprehensive sustainability action plan and to comply with CN's environmental
policy, the Company engages in a number of initiatives, including the use of fuel-efficient locomotives and trucks that reduce greenhouse gas
emissions; increasing operational and building efficiencies; investing in energy-efficient data centers and recycling programs for information
technology systems; reducing, recycling and reusing waste and scrap at its facilities and on its network; engaging in modal shift agreements
that favor low emission transport services; and participating in the Carbon Disclosure Project (CDP) to gain a more comprehensive view of its
carbon footprint. The Company combines its expert resources, environmental management procedures, training and audits for employees and
contractors, and emergency preparedness response activities to help ensure that it conducts its operations and activities while protecting the
natural environment. The Company's environmental activities include monitoring CN's environmental performance in Canada and the U.S.,
identifying environmental issues inside the Company, and managing them in accordance with CN's environmental policy, which is overseen by
the Environment, Safety and Security Committee of the Board of Directors. Certain risk mitigation strategies, such as periodic audits, employee
training programs and emergency plans and procedures, are in place to minimize the environmental risks to the Company.
The Company's CDP Report, CN's Sustainability Report entitled "Delivering Responsibly" and the Company's Corporate Governance Manual,
which outlines the role and responsibilities of the Environment, Safety and Security Committee of the Board of Directors, are available on CN's
website in the Delivering Responsibly section.
Building a solid team of railroaders
CN's ability to develop the best railroaders in the industry has been a key contributor to the Company's success. CN recognizes that without the
right people - no matter how good a service plan or business model a company may have - it will not be able to fully execute. CN is taking steps
to further align its business and talent strategies by placing a greater emphasis on the identification of specific roles across all functions that
drive the greatest impact to the Company's business agenda, and ensuring the right talent are in these critical roles. The Company continues to
focus on hiring the right people, onboarding them successfully, helping them build positive relationships with their colleagues, and supporting
all employees to grow and develop, while deepening its commitment to develop talent and plan for the future. CN also recognizes the
importance of diversity as it provides for a broad range of strengths, perspectives and experiences that makes CN better. It helps the Company
attract and retain qualified talent, and it fosters innovation by bringing the best solutions to the table. As part of its strategy to build a solid
team of railroaders, the Company leverages its state-of-the-art training facilities in preparing employees to be highly skilled, safety conscious
and confident in their work environment. Curricula for technical training and leadership development has been designed to meet the learning
needs of CN's railroaders - both current and future. These programs and initiatives provide a solid platform for the assessment and
development of the Company's talent pool, and are tightly integrated with the Company's business strategy. Progress made in developing
current and future leaders through the Company's leadership development programs is reviewed by the Human Resources and Compensation
Committee of the Board of Directors.
2019 Highlights
The Company completed a record capital expenditure program, investing approximately $3.9 billion in 2019, with increased spending on
initiatives to increase capacity, particularly in the Company’s Western Region, supporting the Company’s ability to grow at low incremental cost.
Financial highlights - 2019 compared to 2018
• Net income decreased by $112 million, or 3%, to $4,216 million and diluted earnings per share decreased by 1% to $5.83.
• Adjusted net income increased by $133 million, or 3%, to $4,189 million and adjusted diluted earnings per share increased by 5% to $5.80. (1)
• Operating income increased by $100 million, or 2%, to $5,593 million and adjusted operating income increased by $188 million, or 3%, to
$5,708 million. (1)
• Operating ratio of 62.5%, an increase of 0.9 points and adjusted operating ratio of 61.7%, an increase of 0.2 points. (1)
•
Revenues increased by $596 million, or 4%, to $14,917 million.
• Operating expenses increased by $496 million, or 6%, to $9,324 million.
•
•
ROIC of 15.3%, a decrease of 1.4 points and adjusted ROIC of 15.1%, a decrease of 0.6 points. (2)
The Company generated free cash flow of $1,992 million, a 21% decrease. (3)
(1) See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
(2) See the section of this MD&A entitled Return on invested capital (ROIC) and adjusted ROIC for an explanation of these non-GAAP measures.
(3) See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
CN | 2019 Annual Report 5
Management's Discussion and Analysis
Reinvestment in the business
In 2019, CN spent approximately $3.9 billion in its capital program, with $1.6 billion invested to maintain the safety and integrity of the network,
particularly track infrastructure. CN's capital spending also included $1.2 billion on strategic initiatives to increase capacity, enable growth and
improve network resiliency, including line capacity upgrades and information technology initiatives, $0.9 billion on equipment capital
expenditures, including the acquisition of 154 new high-horsepower locomotives and 560 new grain hopper cars, and $0.2 billion on
implementation of Positive Train Control (PTC), the safety technology system mandated by the U.S. Congress.
Acquisitions
On December 2, 2019, following satisfaction of all closing conditions, the Company acquired the intermodal temperature-controlled
transportation division of the Alberta-based H&R Transport Limited ("H&R"). The acquisition positions CN to expand its presence in moving
customer goods by offering more end to end rail supply chain solutions to a wider range of customers. H&R results of operations have been
included in the Company's results of operations since the acquisition date, December 2, 2019. H&R revenues are included as freight revenues in
the intermodal commodity group.
On August 29, 2019, the Company announced it had reached an agreement to acquire the Massena rail line from CSX Corporation, which
represents more than 220 miles of track between Valleyfield, Quebec, and Woodard, New York. The acquisition will allow CN to continue to
expand its network and foster additional supply chain solutions. The acquisition remains subject to regulatory review.
On March 20, 2019, following satisfaction of all closing conditions, the Company acquired the Manitoba-based TransX Group of
Companies ("TransX"). TransX provides various transportation and logistics services, including intermodal, truckload, less than truckload and
specialized services. The acquisition positions CN to strengthen its intermodal business, and allows the Company to expand capacity and
foster additional supply chain solutions, to continue to create value for customers. TransX's results of operations have been included in the
Company's results of operations, since the acquisition date, March 20, 2019. TransX’s revenues are included as freight revenues in the
intermodal commodity group. The inclusion of TransX’s results of operations impacted the Company’s Revenues and Operating expenses, in
particular Purchased services and material and Labor and fringe benefits, for the year ended December 31, 2019 when compared to 2018. See
the section of this MD&A entitled Liquidity and capital resources - Investing activities for additional information.
Shareholder returns
The Company repurchased 14.3 million of its common shares during the year, returning $1.7 billion to its shareholders. CN also increased its
quarterly dividend per share by 18% to $0.5375 from $0.4550 in 2018, effective for the first quarter of 2019, and paid $1.5 billion in dividends in
2019.
Sustainability
The Company's sustainability practices once again earned it a place on the Dow Jones Sustainability World and North American Indices, for the
8th and 11th consecutive year, respectively. CN is the only Canadian company and the only North American railroad listed in the Transportation
and Transportation Infrastructure sector World Index. In addition, CN also ranked among Corporate Knights’ 2020 Global 100 Most Sustainable
Corporations in the World.
2020 Business outlook and assumptions
For 2020, the Company expects growth across a range of commodities, particularly in petroleum crude, intermodal traffic, Canadian coal
exports and refined petroleum products; as well as lower volumes of U.S coal exports, U.S. grain, frac sand, and lumber and panels.
Underpinning the 2020 business outlook, the Company assumes that North American industrial production will increase in the range of 0.5
to one percent. For the 2019/2020 crop year, the grain crop in Canada was in line with its three-year average and the U.S. grain crop was below
its three-year average. The Company assumes that the 2020/2021 grain crops in both Canada and the U.S. will be in line with their respective
three-year averages.
Future value creation
Reinvestment in the business
In 2020, CN plans to invest approximately $3.0 billion in its capital program, of which $1.6 billion is targeted toward track and railway
infrastructure maintenance to support safe and efficient operations. A further $0.8 billion is expected to be spent on initiatives to increase
capacity and enable growth, such as track infrastructure expansion; investments in yards and intermodal terminals; and on information
technology to improve safety performance, operational efficiency and customer service. CN's equipment capital expenditures are targeted to
reach $0.4 billion in 2020, allowing the Company to tap growth opportunities and improve the quality of the fleet. In order to handle expected
traffic increase and improve operational efficiency, CN expects to take delivery of 41 new high-horsepower locomotives and 240 new grain
hopper cars. In 2020, the Company plans to invest $0.2 billion associated with the U.S. federal government legislative PTC implementation.
6 CN | 2019 Annual Report
Management's Discussion and Analysis
Shareholder returns
On January 28, 2020, the Company's Board of Directors approved a new Normal Course Issuer Bid (NCIB) that allows for the repurchase of up
to 16 million common shares between February 1, 2020 and January 31, 2021. In addition, on that same day, the Company's Board of Directors
approved an increase of 7% to the quarterly dividend to common shareholders, from $0.5375 per share in 2019 to $0.5750 per share in 2020,
effective for the first quarter.
The forward-looking statements discussed in this section are subject to risks and uncertainties that could cause actual results or performance
to differ materially from those expressed or implied in such statements and are based on certain factors and assumptions which the Company
considers reasonable, about events, developments, prospects and opportunities that may not materialize or that may be offset entirely or
partially by other events and developments. In addition to the assumptions and expectations discussed in this section, reference should be
made to the section of this MD&A entitled Forward-looking statements for assumptions and risk factors affecting such statements.
Forward-looking statements
Certain statements included in this MD&A are "forward-looking statements" within the meaning of the United States Private Securities Litigation
Reform Act of 1995 and under Canadian securities laws. By their nature, forward-looking statements involve risks, uncertainties and
assumptions. The Company cautions that its assumptions may not materialize and that current economic conditions render such assumptions,
although reasonable at the time they were made, subject to greater uncertainty. Forward-looking statements may be identified by the use of
terminology such as "believes," "expects," "anticipates," "assumes," "outlook," "plans," "targets" or other similar words.
Forward-looking statements include, but are not limited to, those set forth in the table below, which also presents key assumptions used in
determining the forward-looking statements. See also the section of this MD&A entitled Strategy overview - 2020 Business outlook and
assumptions.
Forward-looking statements
Key assumptions
Statements relating to revenue growth opportunities, including
those referring to general economic and business conditions
Statements relating to the Company's ability to meet debt
repayments and future obligations in the foreseeable future,
including income tax payments, and capital spending
Statements relating to pension contributions
•
•
•
•
•
•
•
•
•
•
North American and global economic growth
Long-term growth opportunities being less affected by current economic
conditions
North American and global economic growth
Adequate credit ratios
Investment-grade credit ratings
Access to capital markets
Adequate cash generated from operations and other sources of financing
Adequate cash generated from operations and other sources of financing
Adequate long-term return on investment on pension plan assets
Level of funding as determined by actuarial valuations, particularly
influenced by discount rates for funding purposes
Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors which may cause the
actual results or performance of the Company to be materially different from the outlook or any future results or performance implied by such
statements. Accordingly, readers are advised not to place undue reliance on forward-looking statements. Important risk factors that could
affect the forward-looking statements include, but are not limited to, the effects of general economic and business conditions; industry
competition; inflation, currency and interest rate fluctuations; changes in fuel prices; legislative and/or regulatory developments; compliance
with environmental laws and regulations; actions by regulators; increases in maintenance and operating costs; security threats; reliance on
technology and related cybersecurity risk; trade restrictions or other changes to international trade arrangements; transportation of hazardous
materials; various events which could disrupt operations, including natural events such as severe weather, droughts, fires, floods and
earthquakes; climate change; labor negotiations and disruptions; environmental claims; uncertainties of investigations, proceedings or other
types of claims and litigation; risks and liabilities arising from derailments; timing and completion of capital programs; and other risks detailed
from time to time in reports filed by CN with securities regulators in Canada and the U.S., including its Annual Information Form and Form 40-F.
See the section entitled Business risks of this MD&A for a description of major risk factors.
Forward-looking statements reflect information as of the date on which they are made. CN assumes no obligation to update or revise
forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs, unless required by applicable securities
CN | 2019 Annual Report 7
Management's Discussion and Analysis
laws. In the event CN does update any forward-looking statement, no inference should be made that CN will make additional updates with
respect to that statement, related matters, or any other forward-looking statement.
Financial outlook
During the year, the Company issued and updated its 2019 financial outlook. On December 3, 2019, following the impact of an 8-day conductor
strike in late November, CN revised its 2019 financial outlook, remaining focused on continuing to realign its resources in light of the weaker
demand. The 2019 actual results were in line with the Company's last 2019 financial outlook.
Financial highlights
In millions, except percentage and per share data
Revenues
Operating income
Adjusted operating income (1)
Net income
Adjusted net income (1)
Basic earnings per share
Adjusted basic earnings per share (1)
Diluted earnings per share
Adjusted diluted earnings per share (1)
Dividends declared per share
Total assets
Total long-term liabilities
Operating ratio
Adjusted operating ratio (1)
Free cash flow (2)
2019
14,917
5,593
5,708
4,216
4,189
5.85
5.81
5.83
5.80
2.15
43,784
21,456
62.5%
61.7%
1,992
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
14,321
5,493
5,520
4,328
4,056
5.89
5.52
5.87
5.50
1.82
41,214
20,073
61.6%
61.5%
2,514
$
$
$
$
$
$
$
$
$
$
$
$
$
Change
Favorable/(Unfavorable)
2017
2019 vs 2018
2018 vs 2017
13,041
5,243
5,243
5,484
3,778
7.28
5.02
7.24
4.99
1.65
37,629
16,990
59.8%
59.8%
2,778
4%
2%
3%
(3%)
3%
(1%)
5%
(1%)
5%
18%
6%
(7%)
(0.9)-pts
(0.2)-pts
(21%)
10%
5%
5%
(21%)
7%
(19%)
10%
(19%)
10%
10%
10%
(18%)
(1.8)-pts
(1.7)-pts
(10%)
(1)
(2)
See the section of this MD&A entitled Adjusted performance measures for an explanation of these non-GAAP measures.
See the section of this MD&A entitled Liquidity and capital resources – Free cash flow for an explanation of this non-GAAP measure.
2019 compared to 2018
Net income for the year ended December 31, 2019 was $4,216 million, a decrease of $112 million, or 3%, when compared to 2018, and diluted
earnings per share decreased by 1% to $5.83.
Operating income for the year ended December 31, 2019 increased by $100 million, or 2%, to $5,593 million. The increase mainly reflects
increased petroleum and crude and intermodal revenues; partly offset by higher purchased services and material expense, as well as higher
depreciation and amortization expense. The operating ratio, defined as operating expenses as a percentage of revenues, was 62.5% in 2019,
compared to 61.6% in 2018.
Revenues for the year ended December 31, 2019 were $14,917 million compared to $14,321 million in 2018. The increase of $596 million,
or 4%, was mainly attributable to freight rate increases, the inclusion of TransX in the intermodal commodity group within the domestic market,
the positive translation impact of a weaker Canadian dollar and higher volumes of petroleum crude, natural gas liquids and refined petroleum
products in the first nine months. These factors were partly offset by lower volumes of a broad range of forest products, reduced U.S. thermal
coal exports via the Gulf Coast and lower shipments of frac sand.
Operating expenses for the year ended December 31, 2019 were $9,324 million compared to $8,828 million in 2018. The increase of $496
million, or 6%, was mainly due to increased purchased services and material expense, due to the inclusion of TransX, higher depreciation
expense and the negative translation impact of a weaker Canadian dollar; partly offset by lower fuel prices.
8 CN | 2019 Annual Report
Management's Discussion and Analysis
Non-GAAP measures
This MD&A makes reference to non-GAAP measures including adjusted performance measures, constant currency, ROIC and adjusted ROIC,
free cash flow, and adjusted debt-to-adjusted EBITDA multiple that do not have any standardized meaning prescribed by GAAP and therefore,
may not be comparable to similar measures presented by other companies. From management's perspective, these non-GAAP measures are
useful measures of performance and provide investors with supplementary information to assess the Company's results of operations and
liquidity. These non-GAAP measures should not be considered in isolation or as a substitute for financial measures prepared in accordance
with GAAP.
For further details of these non-GAAP measures, including a reconciliation to the most directly comparable GAAP financial measures, refer
to the sections entitled Adjusted performance measures, Constant currency, Return on invested capital (ROIC) and adjusted ROIC, and Liquidity
and capital resources.
Adjusted performance measures
Management believes that adjusted net income, adjusted earnings per share, adjusted operating income and adjusted operating ratio are useful
measures of performance that can facilitate period-to-period comparisons, as they exclude items that do not necessarily arise as part of CN's
normal day-to-day operations and could distort the analysis of trends in business performance. Management uses adjusted performance
measures, which exclude certain income and expense items in its results that management believes are not reflective of CN's underlying
business operations, to set performance goals and as a means to measure CN's performance. The exclusion of such income and expense
items in these measures does not, however, imply that these items are necessarily non-recurring. These measures do not have any
standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.
For the year ended December 31, 2019, the Company reported adjusted net income of $4,189 million, or $5.80 per diluted share, which
excludes employee termination benefits and severance costs related to a workforce reduction program of $31 million, or $23 million after-tax
($0.03 per diluted share) in the fourth quarter; a deferred income tax recovery of $112 million ($0.15 per diluted share or $0.16 per basic share)
in the second quarter, resulting from the enactment of a lower provincial corporate income tax rate; and a depreciation expense of $84 million,
or $62 million after-tax ($0.09 per diluted share) in the first quarter, related to costs previously capitalized for a PTC back office system
following the deployment of a replacement system.
For the year ended December 31, 2018, the Company reported adjusted net income of $4,056 million, or $5.50 per diluted share, which
excludes employee termination benefits and severance costs related to a workforce reduction program of $27 million, or $20 million after-tax
($0.03 per diluted share) in the fourth quarter and gains on disposal of property of $338 million, or $292 million after-tax ($0.40 per diluted
share), consisting of the following:
•
•
•
in the fourth quarter, a gain previously deferred on the 2014 disposal of a segment of the Guelph subdivision located between Georgetown
and Kitchener, Ontario, together with the rail fixtures and certain passenger agreements (the "Guelph"), of $79 million, or $70 million after-
tax ($0.10 per diluted share);
in the third quarter, a gain on disposal of property located in Montreal, Quebec (the "Doney and St-Francois Spurs") of $36 million, or $32
million after-tax ($0.04 per diluted share); and
in the second quarter, a gain on transfer of the Company's finance lease in the passenger rail facilities in Montreal, Quebec, together with
its interests in related railway operating agreements (the "Central Station Railway Lease"), of $184 million, or $156 million after-tax ($0.21
per diluted share), and a gain on disposal of land located in Calgary, Alberta, excluding the rail fixtures (the "Calgary Industrial Lead"), of
$39 million, or $34 million after-tax ($0.05 per diluted share).
For the year ended December 31, 2017, the Company reported adjusted net income of $3,778 million, or $4.99 per diluted share, which
excludes a net deferred income tax recovery of $1,706 million ($2.25 per diluted share or $2.26 per basic share) consisting of the following:
•
•
•
•
in the fourth quarter, a deferred income tax recovery of $1,764 million ($2.33 per diluted share or $2.34 per basic share) resulting from the
enactment of a lower U.S. federal corporate income tax rate due to the Tax Cuts and Jobs Act ("U.S. Tax Reform") and a deferred income
tax expense of $50 million ($0.07 per diluted share) resulting from the enactment of higher provincial corporate income tax rates;
in the third quarter, a deferred income tax expense of $31 million ($0.04 per diluted share) resulting from the enactment of a higher state
corporate income tax rate;
in the second quarter, a deferred income tax recovery of $18 million ($0.02 per diluted share) resulting from the enactment of a lower
provincial corporate income tax rate; and
in the first quarter, a deferred income tax recovery of $5 million ($0.01 per diluted share) resulting from the enactment of a lower provincial
corporate income tax rate.
CN | 2019 Annual Report 9
Management's Discussion and Analysis
The following table provides a reconciliation of net income and earnings per share, as reported for the years ended December 31, 2019,
2018 and 2017, to the adjusted performance measures presented herein:
In millions, except per share data
Year ended December 31,
2019
Net income
Adjustments:
Operating expenses
Other income
Income tax expense (recovery) (1)
Adjusted net income
Basic earnings per share
Impact of adjustments, per share
Adjusted basic earnings per share
Diluted earnings per share
Impact of adjustments, per share
Adjusted diluted earnings per share
$
$
$
$
$
$
4,216
$
115
—
(142)
4,189
5.85
(0.04)
5.81
5.83
(0.03)
5.80
$
$
$
$
$
2018
4,328
27
(338)
39
4,056
5.89
(0.37)
5.52
5.87
(0.37)
5.50
$
$
$
$
$
$
2017
5,484
—
—
(1,706)
3,778
7.28
(2.26)
5.02
7.24
(2.25)
4.99
(1)
The tax effect of adjustments reflects tax rates in the applicable jurisdiction and the nature of the item for tax purposes.
The following table provides a reconciliation of operating income and operating ratio, as reported for the years ended December 31, 2019,
2018 and 2017, to the adjusted performance measures presented herein:
In millions, except percentage
Operating income
Adjustment: Operating expenses
Adjusted operating income
Operating ratio (1)
Impact of adjustment
Adjusted operating ratio
Year ended December 31,
$
$
2019
5,593
115
5,708
$
$
62.5%
(0.8)-pts
61.7%
2018
5,493
27
5,520
$
$
61.6%
(0.1)-pts
61.5%
2017
5,243
—
5,243
59.8%
—
59.8%
(1) Operating ratio is defined as operating expenses as a percentage of revenues.
Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby
facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-
GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US
dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.33 and $1.30 per
US$1.00, for the years ended December 31, 2019 and 2018, respectively.
On a constant currency basis, the Company's net income for the year ended December 31, 2019 would have been lower by $65 million
($0.09 per diluted share).
10 CN | 2019 Annual Report
Management's Discussion and Analysis
Return on invested capital (ROIC) and adjusted ROIC
Management believes ROIC and adjusted ROIC are useful measures of the efficiency in the use of capital funds. The Company calculates ROIC
as return divided by average invested capital. Return is defined as net income plus interest expense after-tax, calculated using the Company's
effective tax rate. Average invested capital is defined as the sum of total shareholders' equity, long-term debt and current portion of long-term
debt less cash and cash equivalents, and restricted cash and cash equivalents, averaged between the beginning and ending balance over a
twelve-month period. The Company calculates adjusted ROIC as adjusted return divided by average invested capital. Adjusted return is defined
as adjusted net income plus interest expense after-tax, calculated using the Company's effective tax rate, excluding the tax effect of
adjustments used to determine adjusted net income. ROIC and adjusted ROIC do not have any standardized meaning prescribed by GAAP and
therefore, may not be comparable to similar measures presented by other companies.
The following table provides a reconciliation of net income and adjusted net income to return and adjusted return, respectively, as well as
the calculation of average invested capital, which have been used to calculate ROIC and adjusted ROIC:
In millions, except percentage
As at and for the year ended December 31,
Net income
Interest expense
Tax on interest expense (1)
Return
Average total shareholders' equity
Average long-term debt
Average current portion of long-term debt
Less: Average cash, cash equivalents, restricted cash and restricted cash equivalents
Average invested capital
ROIC
Adjusted net income (2)
Interest expense
Adjusted tax on interest expense (3)
Adjusted return
Average invested capital
Adjusted ROIC
$
$
$
$
$
$
$
2019
4,216
538
(120)
4,634
17,841
11,626
1,557
(674)
30,350
15.3%
4,189
538
(131)
4,596
30,350
15.1%
$
$
$
$
$
$
$
2018
4,328
489
(116)
4,701
17,149
10,067
1,632
(656)
28,192
16.7%
4,056
489
(120)
4,425
28,192
15.7%
$
$
$
$
$
$
$
2017
5,484
481
(124)
5,841
15,749
9,098
1,785
(613)
26,019
22.4%
3,778
481
(124)
4,135
26,019
15.9%
(1)
(2)
(3)
The effective tax rate for 2019 used to calculate the tax on interest expense was 22.3% (2018 - 23.8%; 2017 - 25.8%). Due to the negative effective tax rate reported by the
Company in 2017, tax on interest expense for 2017 was calculated using an adjusted effective tax rate.
See the section of this MD&A entitled Adjusted performance measures for an explanation of this non-GAAP measure.
The adjusted effective tax rate for 2019 used to calculate the adjusted tax on interest expense was 24.4% (2018 - 24.5%; 2017 - 25.8%).
CN | 2019 Annual Report 11
Management's Discussion and Analysis
Revenues
In millions, unless otherwise indicated
Year ended December 31,
Freight revenues
Other revenues
Total revenues
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Revenue ton miles (RTMs) (millions)
Freight revenue/RTM (cents)
Carloads (thousands)
Freight revenue/carload ($)
$
$
$
$
$
$
2019
14,198
719
14,917
3,052
1,643
1,808
658
2,392
3,787
858
$
14,198
$
241,954
5.87
5,912
2,402
2018
13,548
773
14,321
2,660
1,689
1,886
661
2,357
3,465
830
13,548
248,383
5.45
5,976
2,267
% Change
% Change
at constant
currency
5%
(7%)
4%
15%
(3%)
(4%)
—%
1%
9%
3%
5%
(3%)
8%
(1%)
6%
3%
(8%)
3%
13%
(5%)
(6%)
(2%)
—%
8%
1%
3%
(3%)
6%
(1%)
4%
Revenues for the year ended December 31, 2019, totaled $14,917 million compared to $14,321 million in 2018. The increase of $596 million, or
4%, was mainly attributable to freight rate increases, the inclusion of TransX in the intermodal commodity group within the domestic market, the
positive translation impact of a weaker Canadian dollar and higher volumes of petroleum crude, natural gas liquids and refined petroleum
products in the first nine months. These factors were partly offset by lower volumes of a broad range of forest products, reduced U.S. thermal
coal exports via the Gulf Coast and lower shipments of frac sand. Fuel surcharge revenues decreased by $31 million in 2019, as a result of
lower applicable fuel surcharge rates, partly offset by the positive translation impact of a weaker Canadian dollar.
In 2019, RTMs, measuring the weight and distance of freight transported by the Company, declined by 3% relative to 2018. Freight revenue
per RTM increased by 8% in 2019 when compared to 2018, mainly driven by freight rate increases, the inclusion of TransX in the intermodal
commodity group and the positive translation impact of a weaker Canadian dollar.
Petroleum and chemicals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2019
$
3,052
$
53,989
5.65
688
2018
2,660
50,722
5.24
653
% Change
15%
6%
8%
5%
% Change
at constant
currency
13%
6%
6%
5%
The petroleum and chemicals commodity group comprises a wide range of commodities, including chemicals and plastics, refined petroleum
products, natural gas liquids, crude oil and sulfur. The primary markets for these commodities are within North America, and as such, the
performance of this commodity group is closely correlated with the North American economy as well as oil and gas production. Most of the
Company's petroleum and chemicals shipments originate in the Louisiana petrochemical corridor between New Orleans and Baton Rouge; in
Western Canada, a key oil and gas development area and a major center for natural gas feedstock and world-scale petrochemicals and plastics;
and in eastern Canadian regional plants.
For the year ended December 31, 2019, revenues for this commodity group increased by $392 million, or 15%, when compared to 2018,
mainly due to higher volumes of petroleum crude, natural gas liquids and refined petroleum products in the first nine months; freight rate
increases and the positive translation impact of a weaker Canadian dollar.
Revenue per RTM increased by 8% in 2019 when compared to 2018, mainly due to freight rate increases and the positive translation impact
of a weaker Canadian dollar.
12 CN | 2019 Annual Report
Management's Discussion and Analysis
Percentage of commodity group revenues
Refined petroleum products
Chemicals and plastics
Crude and condensate
Sulfur
Metals and minerals
2019
38%
36%
22%
4%
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2019
$
1,643
$
25,449
6.46
1,008
2018
1,689
27,993
6.03
1,030
% Change
(3%)
(9%)
7%
(2%)
2018
36%
39%
21%
4%
% Change
at constant
currency
(5%)
(9%)
5%
(2%)
The metals and minerals commodity group consists primarily of materials related to oil and gas development, steel, iron ore, non-ferrous base
metals and ores, construction materials, machinery, railway equipment, and dimensional (large) loads. The Company provides unique rail
access to base metals, iron ore and frac sand mining as well as aluminum and steel producing regions, which are among the most important in
North America. This strong origin franchise, coupled with the Company's access to port facilities and the end markets for these commodities,
has made CN a leader in the transportation of metals and minerals products. The key drivers for this market segment are oil and gas
development, automotive production, and non-residential construction.
For the year ended December 31, 2019, revenues for this commodity group decreased by $46 million, or 3%, when compared to 2018,
mainly due to lower volumes of frac sand and a broad range of metal products; partly offset by freight rate increases and the positive
translation impact of a weaker Canadian dollar.
Revenue per RTM increased by 7% in 2019 when compared to 2018, mainly due to a decrease in the average length of haul, freight rate
increases and the positive translation impact of a weaker Canadian dollar.
Percentage of commodity group revenues
Metals
Minerals
Energy materials
Iron ore
Forest products
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
2019
30%
27%
26%
17%
Year ended December 31,
2019
$
1,808
$
27,187
6.65
375
2018
1,886
29,918
6.30
418
% Change
(4%)
(9%)
6%
(10%)
2018
30%
24%
30%
16%
% Change
at constant
currency
(6%)
(9%)
3%
(10%)
The forest products commodity group includes various types of lumber, panels, paper, wood pulp and other fibers such as logs, recycled paper,
wood chips, and wood pellets. The Company has extensive rail access to the western and eastern Canadian fiber-producing regions, which are
among the largest fiber source areas in North America. In the U.S., the Company is strategically located to serve both the Midwest and southern
U.S. corridors with interline connections to other Class I railroads. The key drivers for the various commodities are: for lumber and panels,
housing starts and renovation activities primarily in the U.S.; for fibers (mainly wood pulp), the consumption of paper, pulpboard and tissue in
North American and offshore markets; and for newsprint, advertising lineage, non-print media and overall economic conditions, primarily in the
U.S.
For the year ended December 31, 2019, revenues for this commodity group decreased by $78 million, or 4%, when compared to 2018,
mainly due to lower volumes of a broad range of forest products, partly offset by freight rate increases and the positive translation impact of a
weaker Canadian dollar.
CN | 2019 Annual Report 13
Management's Discussion and Analysis
Revenue per RTM increased by 6% in 2019 when compared to 2018, mainly due to freight rate increases and the positive translation impact
of a weaker Canadian dollar.
Percentage of commodity group revenues
Lumber
Pulp
Paper
Panels
Coal
2019
38%
30%
18%
14%
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2019
$
658
$
17,653
3.73
335
2018
661
17,927
3.69
346
% Change
—%
(2%)
1%
(3%)
2018
40%
29%
18%
13%
% Change
at constant
currency
(2%)
(2%)
—%
(3%)
The coal commodity group consists of thermal grades of bituminous coal, metallurgical coal and petroleum coke. Canadian thermal and
metallurgical coal are largely exported via terminals on the west coast of Canada to offshore markets. In the U.S., thermal coal is transported
from mines served in southern Illinois, or from western U.S. mines via interchange with other railroads, to major utilities in the Midwest and
Southeast U.S., as well as offshore markets via terminals on the U.S. Gulf Coast. Petroleum coke, a by-product of the oil refining process, is
exported to offshore markets via terminals on the west coast of Canada and the U.S. Gulf Coast, as well as shipped to industrial users in
domestic markets. The key drivers for this market segment are weather conditions, environmental regulations, global supply and demand
conditions, and for U.S. domestic coal, the price of natural gas.
For the year ended December 31, 2019, revenues for this commodity group remained flat when compared to 2018, mainly due to lower U.S.
thermal coal exports via the Gulf Coast; offset by higher metallurgical and thermal coal exports via west coast ports and freight rate increases.
Revenue per RTM increased by 1% in 2019 when compared to 2018, mainly due to freight rate increases.
Percentage of commodity group revenues
Canadian coal - export
Petroleum coke
U.S. coal - export
U.S. coal - domestic
Grains and fertilizers
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
2019
40%
22%
19%
19%
Year ended December 31,
2019
$
2,392
$
55,597
4.30
619
2018
2,357
57,819
4.08
632
% Change
1%
(4%)
5%
(2%)
2018
30%
21%
33%
16%
% Change
at constant
currency
—%
(4%)
4%
(2%)
The grain and fertilizers commodity group depends primarily on crops grown and fertilizers processed in Western Canada and the U.S. Midwest.
The grain segment consists of wheat, oats, barley, flaxseed, rye, peas, lentils, corn, ethanol, dried distillers grain, canola seed and canola
products, soybeans and soybean products. Production of grain varies considerably from year to year, affected primarily by weather conditions,
seeded and harvested acreage, the mix of grains produced and crop yields. Grain exports are sensitive to the size and quality of the crop
produced, international market conditions and foreign government policy. The majority of grain produced in Western Canada and moved by CN
is exported via the ports of Vancouver, Prince Rupert and Thunder Bay. These rail movements are subject to government regulation that
establishes a maximum revenue entitlement that railways can earn. Although railway companies are free to set freight rates for western grain
shipments, total revenue is limited based on a formula that takes into account tonnage, length of haul, and a specified price index. Shipments of
grain that are exported to the U.S. are not regulated. Grain grown in the U.S. Midwest is exported as well as transported to domestic processing
14 CN | 2019 Annual Report
Management's Discussion and Analysis
facilities and feed markets. The Company also serves major producers of potash in Canada, as well as producers of ammonium nitrate, urea
and other fertilizers across Canada and the U.S. The key drivers for fertilizers are input prices, demand, government policies, and international
competition.
For the year ended December 31, 2019, revenues for this commodity group increased by $35 million, or 1%, when compared to 2018,
mainly due to freight rate increases, the positive translation impact of a weaker Canadian dollar and higher U.S. soybean exports; partly offset
by lower volumes of potash.
Revenue per RTM increased by 5% in 2019 when compared to 2018, mainly due to freight rate increases and the positive translation impact
of a weaker Canadian dollar.
Percentage of commodity group revenues
2019
2018
Canadian grain - regulated
U.S. grain - domestic
Canadian grain - commercial
Fertilizers - potash
Fertilizers - other
U.S. grain - exports
Intermodal
42%
19%
13%
10%
10%
6%
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2019
$
3,787
$
58,344
6.49
2,618
2018
3,465
60,120
5.76
2,634
% Change
9%
(3%)
13%
(1%)
40%
19%
14%
13%
9%
5%
% Change
at constant
currency
8%
(3%)
12%
(1%)
The intermodal commodity group includes rail and trucking services and is comprised of two markets: domestic intermodal and international
intermodal. Domestic intermodal transports consumer products and manufactured goods, serving both retail and wholesale channels, within
domestic Canada, domestic U.S., Mexico and transborder, while international intermodal handles import and export container traffic, serving the
major ports of Vancouver, Prince Rupert, Montreal, Halifax, New Orleans and Mobile. CN's network of inland intermodal terminals are located
near ports and large urban centers, which connects customers to major markets in North America and overseas. Domestic intermodal is driven
by consumer markets, with growth generally tied to the economy. International intermodal is driven by North American economic and trade
conditions. Revenues for TransX and H&R are included in this commodity group within the domestic market.
For the year ended December 31, 2019, revenues for this commodity group increased by $322 million, or 9%, when compared to 2018,
mainly due to the inclusion of TransX, higher international container traffic via the Port of Prince Rupert, freight rate increases and the positive
translation impact of a weaker Canadian dollar; partly offset by lower international container traffic via the Port of Vancouver and reduced
domestic retail volumes, as well as lower applicable fuel surcharge rates.
Revenue per RTM increased by 13% in 2019 when compared to 2018, mainly due to the inclusion of TransX, freight rate increases and the
positive translation impact of a weaker Canadian dollar.
Percentage of commodity group revenues
International
Domestic
2019
68%
32%
2018
67%
33%
CN | 2019 Annual Report 15
Management's Discussion and Analysis
Automotive
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2019
$
858
$
3,735
22.97
269
2018
830
3,884
21.37
263
% Change
3%
(4%)
7%
2%
% Change
at constant
currency
1%
(4%)
5%
2%
The automotive commodity group moves both domestic finished vehicles and parts throughout North America, providing service to certain
vehicle assembly plants in Ontario, Michigan and Mississippi. The Company also serves vehicle distribution facilities in Canada and the U.S., as
well as parts production facilities in Michigan and Ontario. The Company serves shippers of finished vehicle imports via the ports of Halifax
and Vancouver, and through interchange with other railroads. CN's broad network of auto compounds is used to facilitate distribution of
vehicles throughout Canada and the U.S. Midwest. The primary drivers for this market are automotive production and sales in North America,
which are driven by the average age of vehicles in North America and the price of fuel.
For the year ended December 31, 2019, revenues for this commodity group increased by $28 million, or 3%, when compared to 2018,
mainly due to higher volumes of domestic finished vehicles and vehicle parts in the first nine months, the positive translation impact of a
weaker Canadian dollar and freight rate increases; partly offset by lower import volumes of finished vehicles via the Port of Halifax.
Revenue per RTM increased by 7% in 2019 when compared to 2018, mainly due to a decrease in the average length of haul, the positive
translation impact of a weaker Canadian dollar and freight rate increases.
Percentage of commodity group revenues
Finished vehicles
Auto parts
Other revenues
2019
93%
7%
2018
94%
6%
Revenues (millions)
$
719
$
Year ended December 31,
2019
2018
773
% Change
(7%)
% Change
at constant
currency
(8%)
Other revenues are derived from non-rail logistics services that support the Company's rail business including vessels and docks, transloading
and distribution, automotive logistics, and freight forwarding and transportation management.
For the year ended December 31, 2019, Other revenues decreased by $54 million, or 7%, when compared to 2018, mainly due to lower
2019
47%
44%
9%
2018
50%
42%
8%
revenues from vessels.
Percentage of other revenues
Vessels and docks
Other non-rail services
Other revenues
16 CN | 2019 Annual Report
Management's Discussion and Analysis
Operating expenses
Operating expenses for the year ended December 31, 2019, amounted to $9,324 million compared to $8,828 million in 2018. The increase of
$496 million, or 6%, was mainly due to increased purchased services and material expense, due to the inclusion of TransX, higher depreciation
expense and the negative translation impact of a weaker Canadian dollar; partly offset by lower fuel prices.
In millions
Year ended December 31,
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
Labor and fringe benefits
$
$
2019
2,922
2,267
1,637
1,562
444
492
$
9,324
$
2018
2,860
1,971
1,732
1,329
467
469
8,828
% Change
(2%)
(15%)
5%
(18%)
5%
(5%)
(6%)
% Change
at constant
currency
(1%)
(14%)
8%
(16%)
7%
(3%)
(4%)
Labor and fringe benefits expense includes wages, payroll taxes and employee benefits such as incentive compensation, including stock-based
compensation, health and welfare, current service cost for pensions and postretirement benefits. Certain incentive and stock-based
compensation plans are based on financial performance targets and the related expense is recorded in relation to the attainment of such
targets.
Labor and fringe benefits expense increased by $62 million, or 2%, in 2019 when compared to 2018. The increase was primarily due to the
inclusion of TransX, general wage increases and the negative translation impact of a weaker Canadian dollar; partly offset by lower incentive
compensation.
Purchased services and material
Purchased services and material expense includes the cost of services purchased from outside contractors; materials used in the maintenance
of the Company's track, facilities and equipment; transportation and lodging for train crew employees; utility costs; and the net costs of
operating facilities jointly used by the Company and other railroads.
Purchased services and material expense increased by $296 million, or 15%, in 2019 when compared to 2018. The increase was mainly
due to the inclusion of TransX, higher repairs, maintenance and materials costs, higher costs for services purchased from outside contractors
and the negative translation impact of a weaker Canadian dollar.
Fuel
Fuel expense includes fuel consumed by assets, including locomotives, vessels, vehicles and other equipment as well as federal, provincial and
state fuel taxes.
Fuel expense decreased by $95 million, or 5%, in 2019 when compared to 2018. The decrease was primarily due to lower fuel prices,
decreased volumes of traffic and increased fuel productivity; partly offset by the negative translation impact of a weaker Canadian dollar.
Depreciation and amortization
Depreciation and amortization expense includes the costs associated with the use of properties and intangible assets over their estimated
service lives. Depreciation expense is affected by capital additions, railroad property retirements from disposal, sale and/or abandonment and
other adjustments including asset impairments.
Depreciation and amortization expense increased by $233 million, or 18%, in 2019 when compared to 2018. The increase was mainly due
to a higher depreciable asset base resulting from increased capital expenditures in recent years, an expense related to costs previously
capitalized for a PTC back office system following the deployment of a replacement system and the negative translation impact of a weaker
Canadian dollar.
CN | 2019 Annual Report 17
Management's Discussion and Analysis
Equipment rents
Equipment rents expense includes rental expense for the use of freight cars owned by other railroads (car hire) or private companies and for the
lease of freight cars, locomotives and intermodal equipment, net of rental income from other railroads for the use of the Company's freight cars
(car hire) and locomotives.
Equipment rents expense decreased by $23 million, or 5%, in 2019 when compared to 2018. The decrease was primarily due to lower costs
for leased locomotives, partly offset by higher car hire expense and the negative translation impact of a weaker Canadian dollar.
Casualty and other
Casualty and other expense includes expenses for personal injuries, environmental, freight and property damage, insurance, bad debt, operating
taxes, and travel expenses.
Casualty and other expense increased by $23 million, or 5%, in 2019 when compared to 2018. The increase was mainly due to higher
incident costs and the negative translation impact of a weaker Canadian dollar; partly offset by lower legal provisions.
Other income and expenses
Interest expense
In 2019, Interest expense was $538 million compared to $489 million in 2018. The increase was mainly due to a higher average level of debt
and the negative translation impact of a weaker Canadian dollar; partly offset by a lower average interest rate.
Other components of net periodic benefit income
In 2019, Other components of net periodic benefit income was $321 million compared to $302 million in 2018. The increase was mainly due to
lower amortization of net actuarial loss, partly offset by higher interest cost.
Other income
In 2019, Other income was $53 million compared to $376 million in 2018. Included in Other income for 2018 was a gain previously deferred on
the 2014 disposal of the Guelph of $79 million, a gain on disposal of the Doney and St-Francois Spurs of $36 million, a gain on the transfer of
the Central Station Railway Lease of $184 million, and a gain on disposal of the Calgary Industrial Lead of $39 million.
Income tax recovery (expense)
On December 22, 2017, the President of the United States signed into law the U.S. Tax Reform, which reduced the U.S. federal corporate income
tax rate from 35% to 21% effective as of January 1, 2018. The U.S. Tax Reform also allows for immediate capital expensing of new investments
in certain qualified depreciable assets made after September 27, 2017, which will be phased down starting in year 2023. As a result of the U.S.
Tax Reform, the Company's net deferred income tax liability decreased by $1,764 million for the year ended December 31, 2017.
The U.S. Tax Reform introduced other important changes to U.S. corporate income tax laws including the creation of a new Base Erosion
Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes and limitations to the
deduction for net interest expense incurred by U.S. corporations. Since the enactment of the U.S. Tax Reform, U.S. authorities have issued
various proposed and finalized regulations and guidance interpreting its provisions. These interpretations have been taken into account in
calculating the Company's current year income tax provision and tax payments. The U.S. Tax Reform and these regulations are expected to
impact the Company's income tax provisions and tax payments in future years.
In 2019, the Company recorded an income tax expense of $1,213 million compared to an income tax expense of $1,354 million in 2018.
Included in the 2019 figure was a deferred income tax recovery of $112 million recorded in the second quarter, resulting from the enactment of
a lower provincial corporate income tax rate.
The effective tax rate for 2019 was 22.3% compared to 23.8% in 2018. Excluding the aforementioned deferred income tax recovery, the
effective tax rate for 2019 was 24.4% compared to 23.8% in 2018. The increase in the effective tax rate was mainly attributable to lower gains
on disposal of property in 2019, taxed at the lower capital gain inclusion rate.
For 2020, the Company anticipates the estimated annual effective tax rate to be in the range of 26.0%. The anticipated increase is due to
the U.S. Tax Reform, and the related proposed and finalized regulations and interpretations issued as of December 2019.
18 CN | 2019 Annual Report
Management's Discussion and Analysis
2018 compared to 2017
Net income for the year ended December 31, 2018 was $4,328 million, a decrease of $1,156 million, or 21%, when compared to 2017, and
diluted earnings per share decreased by 19% to $5.87. The decrease was primarily due to a deferred income tax recovery of $1,764 million
($2.33 per diluted share) resulting from the enactment of a lower U.S. federal corporate income tax rate due to the U.S. Tax Reform in 2017,
partly offset by an increase in Operating income and Other income.
Operating income for the year ended December 31, 2018 increased by $250 million, or 5%, to $5,493 million. The increase mainly reflects
increased revenues from freight rate increases, higher applicable fuel surcharge rates and higher volumes, partly offset by higher costs from
higher fuel prices and higher labor costs. The operating ratio was 61.6% in 2018, compared to 59.8% in 2017.
Revenues for the year ended December 31, 2018 were $14,321 million compared to $13,041 million in 2017. The increase of $1,280 million,
or 10%, was mainly attributable to freight rate increases, higher applicable fuel surcharge rates and higher volumes of petroleum crude, refined
petroleum products, coal, international container traffic and Canadian grain.
Operating expenses for the year ended December 31, 2018 were $8,828 million compared to $7,798 million in 2017. The increase of $1,030
million, or 13%, was mainly due to higher fuel prices, higher costs as a result of increased volumes of traffic and operating performance below
2017 levels.
Constant currency
Financial results at constant currency allow results to be viewed without the impact of fluctuations in foreign currency exchange rates, thereby
facilitating period-to-period comparisons in the analysis of trends in business performance. Measures at constant currency are considered non-
GAAP measures and do not have any standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures
presented by other companies. Financial results at constant currency are obtained by translating the current period results denominated in US
dollars at the foreign exchange rates of the comparable period of the prior year. The average foreign exchange rates were $1.296 and $1.298
per US$1.00, for the years ended December 31, 2018 and 2017, respectively.
On a constant currency basis, the Company's net income for the year ended December 31, 2018 would have been higher by $4 million
($0.01 per diluted share).
Revenues
In millions, unless otherwise indicated
Year ended December 31,
Freight revenues
Other revenues
Total revenues
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Revenue ton miles (RTMs) (millions)
Freight revenue/RTM (cents)
Carloads (thousands)
Freight revenue/carload ($)
$
$
$
$
$
$
2018
13,548
773
14,321
2,660
1,689
1,886
661
2,357
3,465
830
$
13,548
$
248,383
5.45
5,976
2,267
2017
12,293
748
13,041
2,208
1,523
1,788
535
2,214
3,200
825
12,293
237,098
5.18
5,737
2,143
% Change
% Change
at constant
currency
10%
3%
10%
20%
11%
5%
24%
6%
8%
1%
10%
5%
5%
4%
6%
10%
3%
10%
20%
11%
6%
24%
7%
8%
1%
10%
5%
5%
4%
6%
Revenues for the year ended December 31, 2018, totaled $14,321 million compared to $13,041 million in 2017. The increase of $1,280 million,
or 10%, was mainly attributable to freight rate increases, higher applicable fuel surcharge rates and higher volumes of petroleum crude, refined
petroleum products, coal, international container traffic and Canadian grain. Fuel surcharge revenues increased by $395 million in 2018, as a
result of higher applicable fuel surcharge rates.
In 2018, RTMs increased by 5% relative to 2017. Freight revenue per RTM increased by 5% in 2018 when compared to 2017, mainly driven
by freight rate increases and higher applicable fuel surcharge rates.
CN | 2019 Annual Report 19
Management's Discussion and Analysis
Petroleum and chemicals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
$
$
2018
2,660
50,722
5.24
653
2017
2,208
44,375
4.98
614
% Change
20%
14%
5%
6%
% Change
at constant
currency
20%
14%
5%
6%
For the year ended December 31, 2018, revenues for this commodity group increased by $452 million, or 20%, when compared to 2017, mainly
due to higher volumes of petroleum crude due to limited pipeline capacity and increased volumes of refined petroleum products, freight rate
increases, and higher applicable fuel surcharge rates; partly offset by lower volumes of condensate.
Revenue per RTM increased by 5% in 2018 when compared to 2017, mainly due to freight rate increases and higher applicable fuel
surcharge rates; partly offset by an increase in the average length of haul.
Metals and minerals
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
$
$
2018
1,689
27,993
6.03
1,030
2017
1,523
27,938
5.45
995
% Change
11%
—%
11%
4%
% Change
at constant
currency
11%
—%
11%
4%
For the year ended December 31, 2018, revenues for this commodity group increased by $166 million, or 11%, when compared to 2017, mainly
due to freight rate increases; higher volumes of semi-finished steel products, and increased shipments of industrial materials and iron ore; and
higher applicable fuel surcharge rates; partly offset by lower volumes of frac sand.
Revenue per RTM increased by 11% in 2018 when compared to 2017, mainly due to freight rate increases and higher applicable fuel
surcharge rates.
Forest products
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
$
$
2018
1,886
29,918
6.30
418
2017
1,788
30,510
5.86
424
% Change
5%
(2%)
8%
(1%)
% Change
at constant
currency
6%
(2%)
8%
(1%)
For the year ended December 31, 2018, revenues for this commodity group increased by $98 million, or 5%, when compared to 2017, mainly due
to freight rate increases and higher applicable fuel surcharge rates, partly offset by decreased volumes of lumber and woodpulp.
Revenue per RTM increased by 8% in 2018 when compared to 2017, mainly due to freight rate increases and higher applicable fuel
surcharge rates.
20 CN | 2019 Annual Report
Management's Discussion and Analysis
Coal
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2018
$
661
$
17,927
3.69
346
2017
535
14,539
3.68
303
% Change
24%
23%
—%
14%
% Change
at constant
currency
24%
23%
—%
14%
For the year ended December 31, 2018, revenues for this commodity group increased by $126 million, or 24%, when compared to 2017, mainly
due to increased exports of U.S. thermal coal via the Gulf Coast, higher metallurgical coal exports via west coast ports, higher applicable fuel
surcharge rates as well as freight rate increases.
Revenue per RTM remained flat in 2018 when compared to 2017, mainly due to higher applicable fuel surcharge rates and freight rate
increases, offset by an increase in the average length of haul.
Grain and fertilizers
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
$
$
2018
2,357
57,819
4.08
632
2017
2,214
56,123
3.94
619
% Change
6%
3%
4%
2%
% Change
at constant
currency
7%
3%
4%
2%
For the year ended December 31, 2018, revenues for this commodity group increased by $143 million, or 6%, when compared to 2017, mainly
due to freight rate increases, higher export volumes of Canadian wheat, peas and lentils, and higher applicable fuel surcharge rates; partly
offset by reduced Canadian canola volumes, as well as lower export volumes of U.S. soybeans.
Revenue per RTM increased by 4% in 2018 when compared to 2017, mainly due to freight rate increases and higher applicable fuel
surcharge rates.
Intermodal
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
$
$
2018
3,465
60,120
5.76
2,634
2017
3,200
59,356
5.39
2,514
% Change
8%
1%
7%
5%
% Change
at constant
currency
8%
1%
7%
5%
For the year ended December 31, 2018, revenues for this commodity group increased by $265 million, or 8%, when compared to 2017, mainly
due to higher applicable fuel surcharge rates, increased international container traffic via the ports of Prince Rupert and Montreal, and freight
rate increases; partly offset by lower international container traffic via the Port of Vancouver, as well as reduced domestic retail shipments.
Revenue per RTM increased by 7% in 2018 when compared to 2017, mainly due to higher applicable fuel surcharge rates and freight rate
increases.
CN | 2019 Annual Report 21
Management's Discussion and Analysis
Automotive
Revenues (millions)
RTMs (millions)
Revenue/RTM (cents)
Carloads (thousands)
Year ended December 31,
2018
$
830
$
3,884
21.37
263
2017
825
4,257
19.38
268
% Change
1%
(9%)
10%
(2%)
% Change
at constant
currency
1%
(9%)
11%
(2%)
For the year ended December 31, 2018, revenues for this commodity group increased by $5 million, or 1%, when compared to 2017, mainly due
to higher applicable fuel surcharge rates and freight rate increases; partly offset by lower volumes of domestic finished vehicles.
Revenue per RTM increased by 10% in 2018 when compared to 2017, mainly due to a decrease in the average length of haul, higher
applicable fuel surcharge rates and freight rate increases.
Other revenues
Revenues (millions)
$
773
$
Year ended December 31,
2018
2017
748
% Change
3%
% Change
at constant
currency
3%
For the year ended December 31, 2018, Other revenues increased by $25 million, or 3%, when compared to 2017, mainly due to higher revenues
from freight forwarding and transportation management services, and vessels and docks.
Operating expenses
Operating expenses for the year ended December 31, 2018 amounted to $8,828 million compared to $7,798 million in 2017. The increase of
$1,030 million, or 13%, was mainly due to higher fuel prices, higher costs as a result of increased volumes of traffic and operating performance
below 2017 levels.
In millions
Year ended December 31,
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization
Equipment rents
Casualty and other
Total operating expenses
Labor and fringe benefits
$
$
2018
2,860
1,971
1,732
1,329
467
469
$
8,828
$
2017
2,536
1,769
1,362
1,281
418
432
7,798
% Change
(13%)
(11%)
(27%)
(4%)
(12%)
(9%)
(13%)
% Change
at constant
currency
(13%)
(11%)
(27%)
(4%)
(12%)
(9%)
(13%)
Labor and fringe benefits expense increased by $324 million, or 13%, in 2018 when compared to 2017. The increase was primarily due to higher
headcount, general wage increases, higher overtime costs and training costs for new employees, higher pension expense, and employee
termination benefits and severance costs related to a workforce reduction program in the fourth quarter.
Purchased services and material
Purchased services and material expense increased by $202 million, or 11%, in 2018 when compared to 2017. The increase was mainly due to
higher costs of services purchased from outside contractors, higher trucking and transload costs, and higher repairs, maintenance and
materials costs resulting mainly from increased volumes of traffic.
Fuel
Fuel expense increased by $370 million, or 27%, in 2018 when compared to 2017. The increase was primarily due to higher fuel prices and
increased volumes of traffic.
22 CN | 2019 Annual Report
Management's Discussion and Analysis
Depreciation and amortization
Depreciation and amortization expense increased by $48 million, or 4%, in 2018 when compared to 2017. The increase was mainly due to net
asset additions, partly offset by the favorable impact of depreciation studies.
Equipment rents
Equipment rents expense increased by $49 million, or 12%, in 2018 when compared to 2017. The increase was primarily due to higher costs for
leased locomotives and higher car hire expense.
Casualty and other
Casualty and other expense increased by $37 million, or 9%, in 2018 when compared to 2017. The increase was mainly due to higher incident
costs and higher legal provisions.
Other income and expenses
Interest expense
In 2018, interest expense was $489 million compared to $481 million in 2017. The increase was mainly due to a higher average level of debt,
partly offset by a lower average interest rate.
Other components of net periodic benefit income
In 2018, Other components of net periodic benefit income was $302 million compared to $315 million in 2017.
Other income
In 2018, Other income was $376 million compared to $12 million in 2017. Included in Other income for 2018 was a gain previously deferred on
the 2014 disposal of the Guelph of $79 million, a gain on disposal of the Doney and St-Francois Spurs of $36 million, a gain on the transfer of
the Central Station Railway Lease of $184 million, and a gain on disposal of the Calgary Industrial Lead of $39 million.
Income tax recovery (expense)
In 2018, the Company recorded an income tax expense of $1,354 million compared to an income tax recovery of $395 million in 2017. Included
in the 2017 figure was a net deferred income tax recovery of $1,706 million consisting of a deferred income tax recovery of $1,764 million
recorded in the fourth quarter, resulting from the enactment of the U.S. Tax Reform; deferred income tax expenses of $50 million recorded in the
fourth quarter and $31 million recorded in the third quarter, resulting from the enactment of higher provincial corporate income tax rates and a
higher state corporate income tax rate, respectively; and deferred income tax recoveries of $18 million recorded in the second quarter and $5
million recorded in the first quarter, both resulting from the enactment of lower provincial corporate income tax rates.
The effective tax rate for 2018 was 23.8% compared to (7.8)% in 2017. Excluding the aforementioned deferred income tax recoveries and
expenses, the effective tax rate for 2018 was 23.8% compared to 25.8% in 2017. The decrease in the effective tax rate was mainly attributable
to a lower U.S. Federal corporate tax rate and gains on disposal of property taxed at the lower capital gain inclusion rate.
CN | 2019 Annual Report 23
Management's Discussion and Analysis
Summary of quarterly financial data
2019
Quarters
2018
Quarters
In millions, except per share data
Revenues
Operating income (1)
Net income (1)
Basic earnings per share
Diluted earnings per share
Dividends per share
Fourth
3,584
1,218
873
1.22
1.22
$
$
$
$
$
Third
3,830
1,613
1,195
1.66
1.66
$
$
$
$
$
Second
3,959
1,682
1,362
1.89
1.88
$
$
$
$
$
First
3,544
1,080
786
1.08
1.08
$
$
$
$
$
Fourth
3,808
1,452
1,143
1.57
1.56
$
$
$
$
$
Third
3,688
1,492
1,134
1.55
1.54
$
$
$
$
$
Second
3,631
1,519
1,310
1.78
1.77
$
$
$
$
$
First
3,194
1,030
741
1.00
1.00
$
$
$
$
$
$ 0.5375
$ 0.5375
$ 0.5375
$ 0.5375
$ 0.4550
$ 0.4550
$ 0.4550
$ 0.4550
(1)
Certain quarters include items that management believes do not necessarily arise as part of CN's normal day-to-day operations and can distort the analysis of trends in
business performance. See the section of this MD&A entitled Adjusted performance measures for additional information on these items.
Revenues generated by the Company during the year are influenced by seasonal weather conditions, general economic conditions, cyclical
demand for rail transportation, and competitive forces in the transportation marketplace (see the section entitled Business risks of this MD&A).
Operating expenses reflect the impact of freight volumes, seasonal weather conditions, labor costs, fuel prices, and the Company's productivity
initiatives. Fluctuations in the Canadian dollar relative to the US dollar have also affected the conversion of the Company's US dollar-
denominated revenues and expenses and resulted in fluctuations in net income in the rolling eight quarters presented above.
Summary of fourth quarter 2019
Fourth quarter 2019 net income was $873 million, a decrease of $270 million, or 24%, when compared to the same period in 2018, and diluted
earnings per share decreased by 22% to $1.22.
Operating income for the quarter ended December 31, 2019 decreased by $234 million, or 16%, to $1,218 million, when compared to the
same period in 2018. The decrease mainly reflects lower revenues across all the commodity groups, other than intermodal. The operating ratio
was 66.0% in the fourth quarter of 2019 compared to 61.9% in the fourth quarter of 2018.
Revenues for the fourth quarter of 2019 decreased by $224 million, or 6%, to $3,584 million, when compared to the same period in 2018.
The decrease was mainly attributable to lower volumes, due to the weakening economic environment and the conductor strike in November;
partly offset by the inclusion of TransX in the intermodal commodity group within the domestic market, freight rate increases and higher
international container traffic via the Port of Prince Rupert. Fuel surcharge revenues decreased by $64 million in the fourth quarter of 2019,
mainly due to lower applicable fuel surcharge rates.
Operating expenses for the fourth quarter of 2019 remained flat when compared to the same period in 2018. The increases in purchased
services and material expense, due to the inclusion of TransX, and depreciation expense; were offset by lower costs from decreased volumes of
traffic and lower incentive compensation.
24 CN | 2019 Annual Report
Management's Discussion and Analysis
Financial position
The following tables provide an analysis of the Company's balance sheet as at December 31, 2019 as compared to 2018. Assets and liabilities
denominated in US dollars have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. As at
December 31, 2019 and 2018, the foreign exchange rates were $1.2990 and $1.3637 per US$1.00, respectively.
December 31,
2019
2018
Foreign
exchange
impact
Variance
excluding
foreign
exchange
Explanation of variance,
other than foreign exchange impact
$
43,784
$
41,214
$
(968)
$
3,538
39,669
37,773
(884)
2,780 See the section of this MD&A entitled
In millions
Total assets
Variance mainly due to:
Properties
Operating lease right-of-use
assets
Pension asset
520
336
—
446
—
—
Liquidity and capital resources - Investing
activities, property additions of $4,079
million, partly offset by depreciation of
$1,559 million.
520 Increase due to Adoption of ASU 2016-02:
Leases and related amendments (Topic
842).
(110) Decrease primarily due to the reduction in
the year-end discount rate from 3.77% in
2018 to 3.10% in 2019, partly offset by
higher actual returns.
Total liabilities
$
25,743
$
23,573
$
(723)
$
2,893
Variance mainly due to:
Deferred income taxes
7,844
7,480
(184)
548 Increase due to deferred income tax
Pension and other
postretirement benefits
733
707
(9)
expense of $569 million recorded in Net
income, partly offset by a deferred income
tax recovery of $21 million recorded in
Other comprehensive income (loss),
mostly attributable to new temporary
differences generated during the year.
35 Increase primarily due to the reduction in
the year-end discount rate from 3.77% in
2018 to 3.10% in 2019, partly offset by
higher actual returns.
Total long-term debt, including
13,796
12,569
(501)
1,728 See the section entitled Liquidity and
the current portion
capital resources - Financing activities for
debt financing activities in 2019, as well as
issuance of finance leases of $214 million.
Operating lease liabilities,
including the current portion
501
—
(16)
517 Increase due to Adoption of ASU 2016-02:
Leases and related amendments (Topic
842).
In millions
December 31,
2019
2018
Variance Explanation of variance
Total shareholders' equity
$
18,041
$
17,641
$
400
Variance mainly due to:
Accumulated other
comprehensive loss
(3,483)
(2,849)
Retained earnings
17,634
16,623
(634) Increase in Other comprehensive loss due
to after-tax amounts of $308 million from
net foreign exchange losses and $326
million resulting from net actuarial losses
on defined benefit pension and post-
retirement benefit plans, net of
amortization.
1,011 Increase primarily due to current year net
income of $4,216 million, partly offset by
share repurchases of $1,627 million and
dividends paid of $1,544 million.
CN | 2019 Annual Report 25
Management's Discussion and Analysis
Liquidity and capital resources
The Company's principal source of liquidity is cash generated from operations, which is supplemented by borrowings in the money markets and
capital markets. To meet its short-term liquidity needs, the Company has access to various financing sources, including an unsecured revolving
credit facility, commercial paper programs, and an accounts receivable securitization program. In addition to these sources, the Company can
issue debt securities to meet its longer-term liquidity needs. The strong focus on cash generation from all sources gives the Company
increased flexibility in terms of meeting its financing requirements.
The Company's primary uses of funds are for working capital requirements, including income tax installments, pension contributions, and
contractual obligations; capital expenditures relating to track infrastructure and other; acquisitions; dividends; and share repurchases. The
Company sets priorities on its uses of available funds based on short-term operational requirements, expenditures to continue to operate a safe
railway and pursue strategic initiatives, while also considering its long-term contractual obligations and returning value to its shareholders; and
as part of its financing strategy, the Company regularly reviews its capital structure, cost of capital, and the need for additional debt financing.
The Company has a working capital deficit, which is common in the capital-intensive rail industry, and is not an indication of a lack of
liquidity. The Company maintains adequate resources to meet daily cash requirements, and has sufficient financial capacity to manage its day-
to-day cash requirements and current obligations. As at December 31, 2019 and 2018, the Company had Cash and cash equivalents of $64
million and $266 million, respectively; Restricted cash and cash equivalents of $524 million and $493 million, respectively; and a working capital
deficit of $1,457 million and $772 million, respectively. The cash and cash equivalents pledged as collateral for a minimum term of one month
pursuant to the Company's bilateral letter of credit facilities are recorded as Restricted cash and cash equivalents. There are currently no
specific requirements relating to working capital other than in the normal course of business as discussed herein.
The Company's U.S. and other foreign subsidiaries maintain sufficient cash to meet their respective operational requirements. If the
Company should require more liquidity in Canada than is generated by its domestic operations, the Company could decide to repatriate funds
associated with undistributed earnings of its foreign operations, including its U.S. and other foreign subsidiaries. The impact on liquidity
resulting from the repatriation of funds held outside Canada would not be significant as such repatriation of funds would not cause significant
tax implications to the Company under the tax laws of Canada and the U.S. and other foreign tax jurisdictions, and the tax treaties currently in
effect between them.
The Company expects cash from operations and its various sources of financing to be sufficient to meet its ongoing obligations. The
Company is not aware of any trends or expected fluctuations in its liquidity that would impact its ongoing operations or financial condition as of
the date of this MD&A.
The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of
2019 using a modified retrospective approach with no restatement of comparative period financial information. Comparative balances
previously referred to as capital leases are now referred to as finance leases. See the section of this MD&A entitled Recent accounting
pronouncements for additional information.
Available financing sources
Shelf prospectus and registration statement
During 2019, under its current shelf prospectus and registration statement, the Company issued a total of $1.25 billion of debt securities in the
Canadian capital markets. The Company's shelf prospectus and registration statement, under which CN may issue debt securities in the
Canadian and U.S. capital markets until March 13, 2020, has remaining capacity of $3.1 billion.
The Company's access to long-term funds in the capital markets depends on its credit ratings and market conditions. The Company
believes that it continues to have access to the capital markets. If the Company were unable to borrow funds at acceptable rates in the capital
markets, the Company could borrow under its credit facilities, draw down on its accounts receivable securitization program, raise cash by
disposing of surplus properties or otherwise monetizing assets, reduce discretionary spending or take a combination of these measures to
assure that it has adequate funding for its business.
Revolving credit facility
On March 15, 2019, the Company's revolving credit facility agreement was amended, which extended the term of the credit facility by one year
and increased the credit facility from $1.8 billion to $2.0 billion, effective May 5, 2019. The increase in capacity provides the Company with
additional financial flexibility. The amended credit facility of $2.0 billion consists of a $1.0 billion tranche maturing on May 5, 2022 and a $1.0
billion tranche maturing on May 5, 2024. The accordion feature included in the credit facility agreement, which provides for an additional $500
million subject to the consent of individual lenders, remains unchanged. The credit facility is available for general corporate purposes, including
backstopping the Company's commercial paper programs.
As at December 31, 2019 and December 31, 2018, the Company had no outstanding borrowings under its revolving credit facility and there
were no draws during the years ended 2019 and 2018.
26 CN | 2019 Annual Report
Management's Discussion and Analysis
Non-revolving credit facility
On July 25, 2019, the Company entered into an agreement for a non-revolving term loan credit facility in the principal amount of up to US$300
million, secured by rolling stock, which may be drawn upon during the period from July 25, 2019 to March 31, 2020. Term loans made under the
facility have a tenor of 20 years, bear interest at a variable rate, and are prepayable at any time without penalty. The credit facility is available for
financing or refinancing the purchase of equipment. As at December 31, 2019, the Company had no outstanding borrowings under its non-
revolving credit facility and there were no draws during the year ended December 31, 2019. On January 24, 2020, the Company requested a
borrowing of US$300 million under its non-revolving credit facility. The funds are expected to be received on February 3, 2020.
Commercial paper
The Company has a commercial paper program in Canada and in the U.S. Both programs are backstopped by the Company's revolving credit
facility. As of May 5, 2019, the maximum aggregate principal amount of commercial paper that could be issued increased from $1.8 billion to
$2.0 billion, or the US dollar equivalent, on a combined basis. The commercial paper programs, which are subject to market rates in effect at the
time of financing, provide the Company with a flexible financing alternative, and can be used for general corporate purposes. The cost of
commercial paper and access to the commercial paper market in Canada and the U.S. are dependent on credit ratings and market conditions. If
the Company were to lose access to its commercial paper program for an extended period of time, the Company could rely on its $2.0 billion
revolving credit facility to meet its short-term liquidity needs.
As at December 31, 2019 and 2018, the Company had total commercial paper borrowings of US$983 million ($1,277 million) and
US$862 million ($1,175 million), respectively, presented in Current portion of long-term debt on the Consolidated Balance Sheets.
Accounts receivable securitization program
The Company has an agreement, expiring on February 1, 2021, to sell an undivided co-ownership interest in a revolving pool of accounts
receivable to unrelated trusts for maximum cash proceeds of $450 million. The trusts are multi-seller trusts and the Company is not the primary
beneficiary. Funding for the acquisition of these assets is customarily through the issuance of asset-backed commercial paper notes by the
unrelated trusts.
The Company has retained the responsibility for servicing, administering and collecting the receivables sold. The average servicing period
is approximately one month and is renewed at market rates then in effect. Subject to customary indemnifications, each trust's recourse is
limited to the accounts receivable transferred.
The accounts receivable securitization program provides the Company with readily available short-term financing for general corporate
use. In the event the program is terminated before its scheduled maturity, the Company expects to meet its future payment obligations through
its various sources of financing including its revolving credit facility and commercial paper program, and/or access to capital markets.
As at December 31, 2019, the Company had accounts receivable securitization borrowings of $200 million, secured by and limited to $224
million of accounts receivable, presented in Current portion of long-term debt on the Consolidated Balance Sheet. As at December 31, 2018, the
Company had no proceeds received under the accounts receivable securitization program.
Bilateral letter of credit facilities
The Company has a series of committed and uncommitted bilateral letter of credit facility agreements. On March 15, 2019, the Company
extended the maturity date of the committed bilateral letter of credit facility agreements to April 28, 2022. The agreements are held with various
banks to support the Company's requirements to post letters of credit in the ordinary course of business. Under the agreements, the Company
has the option from time to time to pledge collateral in the form of cash or cash equivalents, for a minimum term of one month, equal to at least
the face value of the letters of credit issued.
As at December 31, 2019, the Company had outstanding letters of credit of $424 million (2018 - $410 million) under the committed
facilities from a total available amount of $459 million (2018 - $447 million) and $149 million (2018 - $137 million) under the uncommitted
facilities.
As at December 31, 2019, included in Restricted cash and cash equivalents was $429 million (2018 - $408 million) and $90 million (2018 -
$80 million) pledged as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
Additional information relating to the Company's financing sources is provided in Note 13 – Debt to the Company's 2019 Annual Consolidated
Financial Statements.
Credit ratings
The Company's ability to access funding in the debt capital markets and the cost and amount of funding available depends in part on its credit
ratings. Rating downgrades could limit the Company's access to the capital markets, or increase its borrowing costs.
CN | 2019 Annual Report 27
Management's Discussion and Analysis
The following table provides the credit ratings that CN has received from credit rating agencies as of the date of this MD&A:
Dominion Bond Rating Service
Moody's Investors Service
Standard & Poor's
Long-term debt rating
Commercial paper rating
A
A2
A
R-1 (low)
P-1
A-1
These credit ratings are not recommendations to purchase, hold, or sell the securities referred to above. Ratings may be revised or withdrawn at
any time by the credit rating agencies. Each credit rating should be evaluated independently of any other credit rating.
Cash flows
In millions
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of foreign exchange fluctuations on cash, cash equivalents, restricted cash, and
restricted cash equivalents
Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash
equivalents
Cash, cash equivalents, restricted cash, and restricted cash equivalents, beginning of
year
Cash, cash equivalents, restricted cash, and restricted cash equivalents, end of year
Year ended December 31,
2019
$
5,923
$
(4,190)
(1,903)
(1)
$
$
(171)
$
759
588
$
2018
5,918
(3,404)
(2,308)
—
206
553
759
$
$
$
Variance
5
(786)
405
(1)
(377)
206
(171)
Operating activities
Net cash provided by operating activities increased by $5 million in 2019 due to higher cash earnings and advance consideration received
related to a long-term rail freight contract; partly offset by unfavorable changes in working capital.
Pension contributions
The Company's contributions to its various defined benefit pension plans are made in accordance with the applicable legislation in Canada and
the U.S. and such contributions follow minimum and maximum thresholds as determined by actuarial valuations. Pension contributions for the
years ended December 31, 2019 and 2018 of $128 million and $92 million, respectively, primarily represent contributions to the CN Pension
Plan, for the current service cost as determined under the Company's current actuarial valuations for funding purposes. The increase in pension
contributions was mainly due to the Company reducing its current service cost contributions in 2018 for the CN Pension Plan as permitted
based on the prevailing actuarial valuations filed for those respective years. The Company expects to make total cash contributions of
approximately $135 million for all pension plans in 2020.
See the section of this MD&A entitled Critical accounting estimates – Pensions and other postretirement benefits for additional information
pertaining to the funding of the Company's pension plans. Additional information relating to the pension plans is provided in Note 15 – Pensions
and other postretirement benefits to the Company's 2019 Annual Consolidated Financial Statements.
Income tax payments
The Company is required to make scheduled installment payments as prescribed by the tax authorities. In Canada, the Company's domestic
jurisdiction, tax installments in a given year are generally based on the prior year's taxable income whereas in the U.S., the Company's
predominant foreign jurisdiction, they are based on forecasted taxable income of the current year.
In 2019, net income tax payments were $822 million (2018 - $776 million). The increase was mainly due to higher required installment
payments in both Canada and the U.S.
For 2020, the Company's net income tax payments are expected to be approximately $750 million, and include the impacts of the U.S. Tax
Reform, and the related proposed and finalized regulations and interpretations issued as of December 2019. The decrease is primarily due to
lower required installment payments in Canada in 2020.
Investing activities
Net cash used in investing activities increased by $786 million in 2019, mainly as a result of higher property additions, primarily locomotives,
the acquisitions of TransX and H&R and lower proceeds received from the disposal of property in the current year.
28 CN | 2019 Annual Report
Management's Discussion and Analysis
Property additions
In millions
Track and roadway (1)
Rolling stock
Buildings
Information technology
Other
Gross property additions
Less: Finance leases (2)
Property additions (3)
Year ended December 31,
2019
$
2,262
$
999
87
421
310
4,079
214
$
3,865
$
2018
2,341
433
95
459
203
3,531
—
3,531
(1)
(2)
(3)
In 2019, approximately 65% (2018 - 65%) of the Track and roadway property additions were incurred to renew basic infrastructure. Costs relating to normal repairs and
maintenance of Track and roadway properties are expensed as incurred, and amounted to approximately 11% of the Company's total operating expenses in 2019 (2018 -
10%).
Includes re-measurement of finance leases.
Includes $227 million associated with the U.S. federal government legislative PTC implementation in 2019 (2018 - $419 million).
Disposal of property
In 2019, there were no significant disposals of property. In 2018, cash flows from investing activities included cash proceeds of $194 million,
before transaction costs, from the disposals of the Doney and St-Francois spurs, Central Station Railway lease, and Calgary Industrial Lead.
Additional information relating to disposals of property is provided in Note 5 – Other income to the Company's 2019 Annual Consolidated
Financial Statements.
Acquisitions
On December 2, 2019, the Company acquired H&R for a total purchase price of $105 million, of which $95 million was paid on the closing date
and $10 million, mostly related to funds withheld for the indemnification of claims, will be paid within twenty months of the acquisition date.
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed was performed on the basis of their
respective fair values. The Company used a third party to assist in establishing the fair values of the assets acquired and liabilities assumed
which resulted in the recognition of identifiable net assets of $93 million and goodwill of $12 million. The goodwill acquired through the
business combination is mainly attributable to the premium of an established business operation. The Company's purchase price allocation is
preliminary and subject to change over the measurement period, which may be up to one year from the acquisition date.
The Company's Consolidated Balance Sheet includes the assets and liabilities of H&R as of December 2, 2019, the acquisition date. Since
the acquisition date, H&R's results of operations have been included in the Company's results of operations. The Company has not provided pro
forma information relating to the pre-acquisition period as it was not material.
On March 20, 2019, the Company acquired TransX. The total purchase price of $192 million included an initial cash payment of $170
million, additional consideration of $25 million paid on August 27, 2019 upon achievement of targets, less an adjustment of $3 million in the
fourth quarter of 2019 to reflect the settlement of working capital.
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed was performed on the basis of their
respective fair values. The Company used a third party to assist in establishing the fair values of the assets acquired and liabilities assumed
which resulted in the recognition of identifiable net assets of $127 million and goodwill of $65 million. The goodwill acquired through the
business combination is mainly attributable to the premium of an established business operation. The Company's purchase price allocation is
preliminary and subject to change over the measurement period, which may be up to one year from the acquisition date.
The Company's Consolidated Balance Sheet includes the assets and liabilities of TransX as of March 20, 2019, the acquisition date. Since
the acquisition date, TransX's results of operations have been included in the Company's results of operations. The Company has not provided
pro forma information relating to the pre-acquisition period as it was not material.
Additional information relating to the acquisitions is provided in Note 3 - Business combinations to the Company's 2019 Annual Consolidated
Financial Statements.
CN | 2019 Annual Report 29
Management's Discussion and Analysis
2020 Capital expenditure program
In 2020, the Company expects to invest approximately $3.0 billion in its capital program, which will be financed with cash generated from
operations or with cash from financing activities as required, as outlined below:
•
•
•
•
$1.6 billion on track and railway infrastructure maintenance to support safe and efficient operations, including the replacement of rail and
ties, bridge improvements, as well as other general track maintenance;
$0.8 billion on initiatives to increase capacity and enable growth, such as track infrastructure expansion, investments in yards and
intermodal terminals, and on information technology to improve safety performance, operational efficiency and customer service;
$0.4 billion on equipment capital expenditures, allowing the Company to tap growth opportunities and improve the quality of the fleet, and
in order to handle expected traffic increase and improve operational efficiency, CN expects to take delivery of 41 new high-horsepower
locomotives and 240 new grain hopper cars; and
$0.2 billion associated with the U.S. federal government legislative PTC implementation.
Financing activities
Net cash used in financing activities decreased by $405 million in 2019, primarily driven by lower net repayment of debt and lower repurchases
of common shares; partly offset by higher dividends paid.
Debt financing activities
Debt financing activities in 2019 included the following:
•
•
•
•
•
•
On November 1, 2019, issuance of $450 million 3.05% Notes due 2050 in the Canadian capital markets, which resulted in net proceeds of
$443 million;
On February 8, 2019, issuance of $350 million 3.00% Notes due 2029 and $450 million 3.60% Notes due 2049 in the Canadian capital
markets, which resulted in total net proceeds of $790 million;
Net issuance of commercial paper of $141 million;
Proceeds from the accounts receivable securitization program of $420 million;
Repayment of accounts receivable securitization borrowings of $220 million; and
Repayment of finance leases of $162 million.
Debt financing activities in 2018 included the following:
•
•
•
•
•
•
•
•
•
•
On November 7, 2018, issuance of US$650 million ($854 million) 4.45% Notes due 2049 in the U.S. capital markets, which resulted in net
proceeds of $845 million;
On August 30, 2018, early redemption of US$550 million 5.55% Notes due 2019 for US$558 million ($720 million), which resulted in a loss
of US$8 million ($10 million) that was recorded in Other income;
On July 31, 2018, issuance of $350 million 3.20% Notes due 2028 and $450 million 3.60% Notes due 2048 in the Canadian capital markets,
which resulted in total net proceeds of $787 million;
On July 15, 2018, repayment of US$200 million ($264 million) 6.80% Notes due 2018 upon maturity;
On May 15, 2018, repayment of US$325 million ($415 million) 5.55% Notes due 2018 upon maturity;
On February 6, 2018, issuance of US$300 million ($374 million) 2.40% Notes due 2020 and US$600 million ($749 million) 3.65% Notes due
2048 in the U.S. capital markets, which resulted in total net proceeds of $1,106 million;
Net issuance of commercial paper of $99 million;
Proceeds from the accounts receivable securitization program of $530 million;
Repayment of accounts receivable securitization borrowings of $950 million; and
Repayment of finance leases of $44 million.
Cash obtained from the issuance of debt was used for general corporate purposes, including the redemption and refinancing of outstanding
indebtedness, share repurchases, acquisitions and other business opportunities. Additional information relating to the Company's outstanding
debt securities is provided in Note 13 – Debt to the Company's 2019 Annual Consolidated Financial Statements.
Repurchase of common shares
The Company may repurchase its common shares pursuant to a NCIB at prevailing market prices plus brokerage fees, or such other prices as
may be permitted by the TSX. The Company repurchased 14.1 million common shares under its NCIB effective between February 1, 2019 and
January 31, 2020, which allowed for the repurchase of up to 22.0 million common shares.
Previous NCIBs allowed for the repurchase of up to 5.5 million common shares between October 30, 2018 and January 31, 2019, and up to
31.0 million common shares between October 30, 2017 and October 29, 2018.
30 CN | 2019 Annual Report
Management's Discussion and Analysis
The following table provides the information related to the share repurchases for the years ended December 31, 2019, 2018 and 2017:
In millions, except per share data
Year ended December 31,
February 2019 - January 2020 NCIB
Number of common shares
Weighted-average price per share
Amount of repurchase
October 2018 - January 2019 NCIB
Number of common shares
Weighted-average price per share
Amount of repurchase
October 2017 - October 2018 NCIB
Number of common shares
Weighted-average price per share
Amount of repurchase
Total for the year
Number of common shares
Weighted-average price per share
Amount of repurchase
2019
12.8
120.03
1,547
1.5
106.78
153
N/A
N/A
N/A
14.3
118.70
1,700
$
$
$
$
$
$
2018
N/A
N/A
N/A
2.6
109.92
293
16.4
104.19
1,707
19.0
104.99
2,000
$
$
$
$
$
$
$
$
$
$
2017
Total NCIB
12.8
120.03
1,547
4.1
108.82
446
19.3
103.92
2,000
$
$
$
$
$
$
N/A
N/A
N/A
N/A
N/A
N/A
2.9
102.40
293
20.4 (1)
98.27 (1)
2,000 (1)
(1)
Includes 2017 repurchases from the October 2016 - October 2017 NCIB, which consisted of 17.5 million common shares, a weighted-average price per share of $97.60 and
an amount of repurchase of $1,707 million. Includes repurchases in the first and second quarters of 2017, pursuant to private agreements between the Company and arm's-
length third-party sellers.
On January 28, 2020, the Board of Directors of the Company approved a new NCIB, which allows for the repurchase of up to 16 million common
shares between February 1, 2020 and January 31, 2021.
The Company’s NCIB notices may be found online on SEDAR at www.sedar.com and on the SEC's website at www.sec.gov through EDGAR.
Printed copies may be obtained by contacting the Corporate Secretary’s Office.
Share Trusts
The Company's Employee Benefit Plan Trusts ("Share Trusts") purchase CN's common shares on the open market, which are used to deliver
common shares under the Share Units Plan and, beginning in 2019, the Employee Share Investment Plan (ESIP). Shares purchased by the Share
Trusts are retained until the Company instructs the trustee to transfer shares to participants of the Share Units Plan or the ESIP. Additional
information relating to Share Trusts is provided in Note 16 – Share capital to the Company's 2019 Annual Consolidated Financial Statements.
The following table provides the information related to the share purchases and settlements by Share Trusts under the Share Units Plan for
the years ended December 31, 2019, 2018 and 2017:
In millions, except per share data
Year ended December 31,
2019
2018
2017
Share purchases by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of purchase
Share settlements by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlement
$
$
$
$
—
—
—
0.5
88.23
45
$
$
$
$
0.4
104.87
38
0.4
84.53
31
$
$
$
$
0.5
102.17
55
0.3
77.99
24
For the year ended December 31, 2019, the ESIP Share Trusts purchased 0.3 million common shares for $33 million at a weighted-average price
of $118.83 per share.
Dividends paid
During 2019, the Company paid quarterly dividends of $0.5375 per share amounting to $1,544 million, compared to $1,333 million, at the rate of
$0.4550 per share, in 2018. For 2020, the Company's Board of Directors approved an increase of 7% to the quarterly dividend to common
shareholders, from $0.5375 per share in 2019 to $0.5750 per share in 2020.
CN | 2019 Annual Report 31
Management's Discussion and Analysis
Contractual obligations
In the normal course of business, the Company incurs contractual obligations. The following table sets forth the Company's contractual
obligations for the following items as at December 31, 2019:
In millions
Debt obligations (1)
Interest on debt obligations
Finance lease obligations (2)
Operating lease obligations (3)
Purchase obligations (4)
Other long-term liabilities (5)
Total
2020
2021
2022
$
13,662
$
1,871
$
9,884
138
560
1,621
701
509
62
135
1,136
104
$
761
504
72
108
201
56
$
317
485
1
73
120
47
$
2023
187
471
—
51
86
46
2025 &
thereafter
$
10,079
7,452
3
156
38
414
2024
447
463
—
37
40
34
Total contractual obligations
$
26,566
$
3,817
$
1,702
$
1,043
$
841
$
1,021
$
18,142
(1)
(2)
(3)
(4)
(5)
Presented net of unamortized discounts and debt issuance costs and excludes finance lease obligations.
Includes $4 million of imputed interest.
Includes $70 million related to renewal options reasonably certain to be exercised and $59 million of imputed interest.
Includes fixed and variable commitments for rail, information technology services and licenses, locomotives, wheels, engineering services, railroad ties, rail cars, as well as
other equipment and services. Costs of variable commitments were estimated using forecasted prices and volumes.
Includes expected payments for workers' compensation, postretirement benefits other than pensions, net unrecognized tax benefits, environmental liabilities and pension
obligations that have been classified as contractual settlement agreements.
Free cash flow
Management believes that free cash flow is a useful measure of liquidity as it demonstrates the Company's ability to generate cash for debt
obligations and for discretionary uses such as payment of dividends, share repurchases and strategic opportunities. The Company defines its
free cash flow measure as the difference between net cash provided by operating activities and net cash used in investing activities, adjusted
for the impact of business acquisitions, if any. Free cash flow does not have any standardized meaning prescribed by GAAP and therefore, may
not be comparable to similar measures presented by other companies.
The following table provides a reconciliation of net cash provided by operating activities, as reported for the years ended December 31,
2019, 2018 and 2017, to free cash flow:
In millions
Year ended December 31,
2019
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided before financing activities
Adjustment: Acquisitions, net of cash acquired (1)
Free cash flow
$
$
5,923
$
(4,190)
1,733
259
$
2018
5,918
(3,404)
2,514
—
1,992
$
2,514
$
2017
5,516
(2,738)
2,778
—
2,778
(1)
Relates to the acquisitions of H&R Transport Limited ("H&R") and the TransX Group of Companies ("TransX"). See the section of this MD&A entitled Liquidity and capital
resources - Investing activities for additional information.
32 CN | 2019 Annual Report
Management's Discussion and Analysis
Adjusted debt-to-adjusted EBITDA multiple
Management believes that the adjusted debt-to-adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA)
multiple is a useful credit measure because it reflects the Company's ability to service its debt and other long-term obligations. The Company
calculates the adjusted debt-to-adjusted EBITDA multiple as adjusted debt divided by adjusted EBITDA. These measures do not have any
standardized meaning prescribed by GAAP and therefore, may not be comparable to similar measures presented by other companies.
The following table provides a reconciliation of debt and net income to the adjusted measures presented below, which have been used to
calculate the adjusted debt-to-adjusted EBITDA multiple:
In millions, unless otherwise indicated
As at and for the year ended December 31,
2019
2018
Debt
Adjustments:
Operating lease liabilities, including current portion (1)
Pension plans in deficiency
Adjusted debt
Net income
Interest expense
Income tax expense (recovery)
Depreciation and amortization
EBITDA
Adjustments:
Other income
Other components of net periodic benefit income
Operating lease cost (1)
$
$
$
13,796
$
12,569
$
$
$
501
521
14,818
4,216
538
1,213
1,562
7,529
(53)
(321)
171
$
$
579
477
13,625
4,328
489
1,354
1,329
7,500
(376)
(302)
218
Adjusted EBITDA
$
7,326
$
7,040
$
Adjusted debt-to-adjusted EBITDA multiple (times)
2.02
1.94
2017
10,828
478
455
11,761
5,484
481
(395)
1,281
6,851
(12)
(315)
191
6,715
1.75
(1)
The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of 2019. The Company now includes
operating lease liabilities, as defined by Topic 842, in adjusted debt and excludes operating lease cost, as defined by Topic 842, in adjusted EBITDA. Comparative balances
previously referred to as present value of operating lease commitments and operating lease expense have not been adjusted and are now referred to as operating lease
liabilities and operating lease cost, respectively. See the section of this MD&A entitled Recent accounting pronouncements for additional information.
All forward-looking statements discussed in this section are subject to risks and uncertainties and are based on assumptions about events and
developments that may not materialize or that may be offset entirely or partially by other events and developments. See the section of this
MD&A entitled Forward-looking statements for a discussion of assumptions and risk factors affecting such forward-looking statements.
Off balance sheet arrangements
Guarantees and indemnifications
In the normal course of business, the Company enters into agreements that may involve providing guarantees or indemnifications to third
parties and others, which may extend beyond the term of the agreements. These include, but are not limited to, standby letters of credit, surety
and other bonds, and indemnifications that are customary for the type of transaction or for the railway business. As at December 31, 2019, the
Company has not recorded a liability with respect to guarantees and indemnifications. Additional information relating to guarantees and
indemnifications is provided in Note 19 – Major commitments and contingencies to the Company's 2019 Annual Consolidated Financial
Statements.
Outstanding share data
As at January 31, 2020, the Company had 711.2 million common shares and 3.6 million stock options outstanding.
CN | 2019 Annual Report 33
Management's Discussion and Analysis
Financial instruments
Risk management
In the normal course of business, the Company is exposed to various risks from its use of financial instruments. To manage these risks, the
Company follows a financial risk management framework, which is monitored and approved by the Company's Finance Committee, with a goal
of maintaining a strong balance sheet, optimizing earnings per share and free cash flow, financing its operations at an optimal cost of capital
and preserving its liquidity. The Company has limited involvement with derivative financial instruments in the management of its risks and does
not hold or issue them for trading or speculative purposes.
Credit risk
Credit risk arises from cash and temporary investments, accounts receivable and derivative financial instruments. To manage credit risk
associated with cash and temporary investments, the Company places these financial assets with governments, major financial institutions, or
other creditworthy counterparties, and performs ongoing reviews of these entities. To manage credit risk associated with accounts receivable,
the Company reviews the credit history of each new customer, monitors the financial condition and credit limits of its customers, and keeps the
average daily sales outstanding within an acceptable range. The Company works with customers to ensure timely payments, and in certain
cases, requires financial security, including letters of credit. CN also obtains credit insurance for certain high risk customers. Although the
Company believes there are no significant concentrations of customer credit risk, economic conditions can affect the Company's customers
and can result in an increase to the Company's credit risk and exposure to business failures of its customers. A widespread deterioration of
customer credit and business failures of customers could have a material adverse effect on the Company's results of operations, financial
position or liquidity. The Company considers the risk due to the possible non-performance by its customers to be remote.
The Company has limited involvement with derivative financial instruments, however from time to time, it may enter into derivative
financial instruments to manage its exposure to interest rates or foreign currency exchange rates. To manage the counterparty risk associated
with the use of derivative financial instruments, the Company enters into contracts with major financial institutions that have been accorded
investment grade ratings. Though the Company is exposed to potential credit losses due to non-performance of these counterparties, the
Company considers this risk to be remote.
Liquidity risk
Liquidity risk is the risk that sufficient funds will not be available to satisfy financial obligations as they come due. In addition to cash generated
from operations, which represents its principal source of liquidity, the Company manages liquidity risk by aligning other external sources of
funds which can be obtained upon short notice, such as a revolving credit facility, commercial paper programs, and an accounts receivable
securitization program. As well, the Company can issue debt securities in the Canadian and U.S. capital markets under its shelf prospectus and
registration statement. The Company's access to long-term funds in the debt capital markets depends on its credit ratings and market
conditions. The Company believes that its investment grade credit ratings contribute to reasonable access to capital markets. See the section
of this MD&A entitled Liquidity and capital resources for additional information relating to the Company's available financing sources and its
credit ratings.
Foreign currency risk
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and the US dollar affect the Company's revenues and expenses. To manage foreign currency risk, the
Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in foreign
operations. As a result, from the dates of designation, foreign exchange gains and losses on translation of the Company's US dollar-
denominated debt are recorded in Accumulated other comprehensive loss, which minimizes volatility of earnings resulting from the conversion
of US dollar-denominated debt into the Canadian dollar.
The Company also enters into foreign exchange forward contracts to manage its exposure to foreign currency risk. As at December 31,
2019, the Company had outstanding foreign exchange forward contracts with a notional value of US$1,088 million (2018 - US$1,465 million).
Changes in the fair value of foreign exchange forward contracts, resulting from changes in foreign exchange rates, are recognized in Other
income in the Consolidated Statements of Income as they occur. For the year ended December 31, 2019, the Company recorded a loss of $75
million (2018 - gain of $157 million; 2017 - loss of $72 million), related to foreign exchange forward contracts. These gains or losses were
largely offset by the re-measurement of US dollar-denominated monetary assets and liabilities recognized in Other income. As at December 31,
2019, the fair value of outstanding foreign exchange forward contracts included in Other current assets and Accounts payable and other was
$nil and $24 million, respectively (2018 - $67 million and $nil, respectively).
The estimated annual impact on net income of a one-cent change in the Canadian dollar relative to the US dollar is approximately $35
million.
34 CN | 2019 Annual Report
Management's Discussion and Analysis
Interest rate risk
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a
result of changes in market interest rates. Such risk exists in relation to the Company's debt. The Company mainly issues fixed-rate debt, which
exposes the Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the
Company to variability in interest expense.
To manage interest rate risk, the Company manages its borrowings in line with liquidity needs, maturity schedule, and currency and interest
rate profile. In anticipation of future debt issuances, the Company may use derivative instruments such as forward rate agreements. The
Company does not currently hold any significant derivative instruments to manage its interest rate risk.
The estimated annual impact on net income of a one-percent change in the interest rate on floating rate debt is approximately $10 million.
Commodity price risk
The Company is exposed to commodity price risk related to purchases of fuel and the potential reduction in net income due to increases in the
price of diesel. Fuel prices are impacted by geopolitical events, changes in the economy or supply disruptions. Fuel shortages can occur due to
refinery disruptions, production quota restrictions, climate, and labor and political instability.
The Company manages fuel price risk by offsetting the impact of rising fuel prices with the Company's fuel surcharge program. The
surcharge applied to customers is determined in the second calendar month prior to the month in which it is applied, and is generally calculated
using the average monthly price of On-Highway Diesel, and, to a lesser extent, West-Texas Intermediate crude oil.
While the Company's fuel surcharge program provides effective coverage, residual exposure remains given that fuel price risk cannot be
completely managed due to timing and given the volatility in the market. As such, the Company may enter into derivative instruments to
manage such risk when considered appropriate.
Fair value of financial instruments
The financial instruments that the Company measures at fair value on a recurring basis in periods subsequent to initial recognition are
categorized into the following levels of the fair value hierarchy based on the degree to which inputs are observable:
•
•
•
Level 1: Inputs are quoted prices for identical instruments in active markets
Level 2: Significant inputs (other than quoted prices included in Level 1) are observable
Level 3: Significant inputs are unobservable
The carrying amounts of Cash and cash equivalents and Restricted cash and cash equivalents approximate fair value. These financial
instruments include highly liquid investments purchased three months or less from maturity, for which the fair value is determined by reference
to quoted prices in active markets.
The carrying amounts of Accounts receivable, Other current assets, and Accounts payable and other approximate fair value. The fair value
of these financial instruments is not determined using quoted prices, but rather from market observable information. The fair value of derivative
financial instruments, classified as Level 2, used to manage the Company's exposure to foreign currency risk and included in Other current
assets and Accounts payable and other is measured by discounting future cash flows using a discount rate derived from market data for
financial instruments subject to similar risks and maturities.
The carrying amount of the Company's debt does not approximate fair value. The fair value is estimated based on quoted market prices for
the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating,
and remaining maturity. The Company classifies debt as Level 2. As at December 31, 2019, the Company's debt, excluding finance leases, had a
carrying amount of $13,662 million (2018 - $12,540 million) and a fair value of $15,667 million (2018 - $13,287 million).
CN | 2019 Annual Report 35
Management's Discussion and Analysis
Recent accounting pronouncements
The following recent ASUs issued by the Financial Accounting Standards Board (FASB) were adopted by the Company during the current year:
ASU 2016-02 Leases and related amendments (Topic 842)
The ASU requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for all leases greater than twelve months
and requires additional qualitative and quantitative disclosures. The lessor accounting model under the new standard is substantially
unchanged. The guidance must be applied using a modified retrospective approach. Entities may elect to apply the guidance to each prior
period presented with a cumulative-effect adjustment to retained earnings recognized at the beginning of the earliest period presented or to
apply the guidance with a cumulative-effect adjustment to retained earnings recognized at the beginning of the period of adoption.
The new standard provides a number of practical expedients and accounting policy elections upon transition. On January 1, 2019, the
Company did not elect the package of three practical expedients that permits the Company not to reassess prior conclusions about lease
qualification, classification and initial direct costs. Upon adoption, the Company elected the following practical expedients:
•
•
•
•
the use-of-hindsight practical expedient to reassess the lease term and the likelihood that a purchase option will be exercised;
the land easement practical expedient to not evaluate land easements that were not previously accounted for as leases under Topic 840;
the short-term lease exemption for all asset classes that permits entities not to recognize right-of-use assets and lease liabilities onto the
balance sheet for leases with terms of twelve months or less; and
the practical expedient to not separate lease and non-lease components for the freight car asset category.
The Company adopted this standard in the first quarter of 2019 with an effective date of January 1, 2019 using a modified retrospective
approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of comparative period
financial information. As at January 1, 2019, the cumulative-effect adjustment to adopt the new standard increased the balance of Retained
earnings by $29 million, relating to a deferred gain on a sale-leaseback transaction of a real estate property. The initial adoption transition
adjustment to record right-of-use assets and lease liabilities for leases over twelve months on the Company's Consolidated Balance Sheet was
$756 million to each balance. The initial adoption transition adjustment is comprised of finance and operating leases of $215 million and $541
million, respectively. New finance lease right-of-use assets and finance lease liabilities are a result of the reassessment of leases with purchase
options that are reasonably certain to be exercised by the Company under the transition to Topic 842, previously accounted for as operating
leases.
ASU 2017-04 Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment
The ASU simplifies the goodwill impairment test by removing the requirement to compare the implied fair value of goodwill with its carrying
amount. Under the new standard, goodwill impairment tests are performed by comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the value
of goodwill.
The guidance must be applied prospectively. The ASU is effective for annual and any interim impairment tests for periods beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017.
The Company adopted this standard in the first quarter of 2019 with an effective date of January 1, 2019. The adoption of this standard did
not have an impact on the Company’s Consolidated Financial Statements.
The following recent ASUs issued by FASB have an effective date after December 31, 2019 and have not been adopted by the Company:
ASU 2019-12 Income taxes (Topic 740): Simplifying the accounting for income taxes
The ASU adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes
minor improvements to the codification. The ASU introduces new guidance that provides a policy election to not allocate consolidated income
taxes when a member of a consolidated tax return is not subject to income tax, and provides guidance to evaluate whether a step-up in tax
basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. In addition, the ASU
changes the current guidance by making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing
operations; by determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity
method of accounting; by accounting for tax law changes and year-to-date losses in interim periods; and by determining how to apply the
income tax guidance to franchise taxes and other taxes that are partially based on income.
The ASU is effective for annual and any interim period beginning after December 15, 2020. Early adoption is permitted.
The Company is evaluating the effects that the adoption of the ASU will have on its Consolidated Financial Statements; no significant
impact is expected.
36 CN | 2019 Annual Report
Management's Discussion and Analysis
ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments
The ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new standard
replaces the current incurred loss impairment methodology with one that reflects expected credit losses. The adoption of the ASU is not
expected to have a significant impact on the Company’s Consolidated Financial Statements. CN will adopt the requirements of the ASU
effective January 1, 2020.
Other recently issued ASUs required to be applied for periods beginning on or after January 1, 2020 have been evaluated by the Company and
will not have a significant impact on the Company's Consolidated Financial Statements.
Critical accounting estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that
affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the date of
the financial statements. On an ongoing basis, management reviews its estimates based upon available information. Actual results could differ
from these estimates. The Company's policies for income taxes, capital expenditures, depreciation, pensions and other postretirement benefits,
personal injury and other claims and environmental matters, require management's more significant judgments and estimates in the
preparation of the Company's consolidated financial statements and, as such, are considered to be critical. The following information should be
read in conjunction with the Company's 2019 Annual Consolidated Financial Statements and Notes thereto.
Management discusses the development and selection of the Company's critical accounting policies, including the underlying estimates
and assumptions, with the Audit Committee of the Company's Board of Directors. The Audit Committee has reviewed the Company's related
disclosures.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net
deferred income tax asset or liability is included in the computation of Net income or Other comprehensive income (loss). Deferred income tax
assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. As a result, a projection of taxable income is required for those years, as well as an
assumption of the ultimate recovery/settlement period for temporary differences. The projection of future taxable income is based on
management's best estimate and may vary from actual taxable income.
On an annual basis, the Company assesses the need to establish a valuation allowance for its deferred income tax assets, and if it is
deemed more likely than not that its deferred income tax assets will not be realized, a valuation allowance is recorded. The ultimate realization
of deferred income tax assets is dependent upon the generation of sufficient future taxable income, of the necessary character, during the
periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred income tax
liabilities, the available carryback and carryforward periods, and projected future taxable income in making this assessment. As at December
31, 2019, in order to fully realize all of the deferred income tax assets, the Company will need to generate future taxable income of
approximately $3.0 billion, and, based upon the level of historical taxable income, projections of future taxable income of the necessary
character over the periods in which the deferred income tax assets are deductible, and the reversal of taxable temporary differences,
management believes, following an assessment of the current economic environment, it is more likely than not that the Company will realize
the benefits of these deductible differences. See the section of this MD&A entitled Other income and expenses - Income tax recovery (expense)
for information about the U.S. Tax Reform.
In addition, Canadian, or domestic, tax rules and regulations, as well as those relating to foreign jurisdictions, are subject to interpretation
and require judgment by the Company that may be challenged by the taxation authorities upon audit of the filed income tax returns. Tax
benefits are recognized if it is more likely than not that the tax position will be sustained on examination by the taxation authorities. As at
December 31, 2019, the total amount of gross unrecognized tax benefits was $62 million, before considering tax treaties and other
arrangements between taxation authorities. The amount of net unrecognized tax benefits as at December 31, 2019 was $60 million. If
recognized, $7 million of the net unrecognized tax benefits as at December 31, 2019 would affect the effective tax rate. The Company believes
that it is reasonably possible that $23 million of the net unrecognized tax benefits as at December 31, 2019 related to Canadian federal and
provincial income tax matters, may be recognized over the next twelve months as a result of settlements and a lapse of the applicable statute
of limitations, and will not affect the effective tax rate as they relate to temporary differences.
The Company's deferred income tax assets are mainly composed of temporary differences related to net operating losses and tax credit
carryforwards, the pension liability, lease liabilities, accruals for personal injury and other claims, other postretirement benefits liability, and
compensation reserves. The Company's deferred income tax liabilities are mainly composed of temporary differences related to properties,
CN | 2019 Annual Report 37
Management's Discussion and Analysis
operating lease right-of-use assets, and the pension asset. These deferred income tax assets and liabilities are recorded at the enacted tax
rates of the periods in which the related temporary differences are expected to reverse. As a result, fiscal budget changes and/or changes in
income tax laws that affect a change in the timing, the amount, and/or the income tax rate at which the temporary difference components will
reverse, could materially affect deferred income tax expense as recorded in the Company's results of operations. The reversal of temporary
differences is expected at future-enacted income tax rates which could change due to fiscal budget changes and/or changes in income tax
laws. As a result, a change in the timing and/or the income tax rate at which the components will reverse, could materially affect deferred
income tax expense as recorded in the Company's results of operations. From time to time, the federal, provincial, and state governments enact
new corporate income tax rates resulting in either lower or higher tax liabilities. A one-percentage-point change in the Canadian and U.S.
statutory federal tax rate would have the effect of changing the deferred income tax expense by $160 million and $140 million in 2019,
respectively.
For the year ended December 31, 2019, the Company recorded an income tax expense of $1,213 million, of which $569 million was a
deferred income tax expense. The deferred income tax expense included a recovery of $112 million resulting from the enactment of a lower
provincial corporate income tax rate. For the year ended December 31, 2018, the Company recorded an income tax expense of $1,354 million, of
which $527 million was a deferred income tax expense. For the year ended December 31, 2017, the Company recorded total income tax
recovery of $395 million, of which $1,195 million was a deferred income tax recovery. The deferred income tax recovery included a net recovery
of $1,706 million resulting from the enactment of the U.S. Tax Reform, and changes to provincial and state corporate income tax rates. The
Company's net deferred income tax liability as at December 31, 2019 was $7,844 million (2018 - $7,480 million). Additional disclosures are
provided in Note 6 – Income taxes to the Company's 2019 Annual Consolidated Financial Statements.
Depreciation
Properties are carried at cost less accumulated depreciation including asset impairment write-downs. The Company has a process in place to
determine whether or not costs qualify for capitalization, which requires judgment. The cost of properties, including those under finance leases,
net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated service lives, measured in years, except for rail
and ballast whose services lives are measured in millions of gross tons. The Company follows the group method of depreciation whereby a
single composite depreciation rate is applied to the gross investment in a class of similar assets, despite small differences in the service life or
salvage value of individual property units within the same asset class. The Company uses approximately 40 different depreciable asset classes.
For all depreciable assets, the depreciation rate is based on the estimated service lives of the assets. Assessing the reasonableness of the
estimated service lives of properties requires judgment and is based on currently available information, including periodic depreciation studies
conducted by the Company. The Company's U.S. properties are subject to comprehensive depreciation studies as required by the Surface
Transportation Board (STB) and are conducted by external experts. Depreciation studies for Canadian properties are not required by regulation
and are conducted internally. Studies are performed on specific asset groups on a periodic basis. Changes in the estimated service lives of the
assets and their related composite depreciation rates are implemented prospectively.
The studies consider, among other factors, the analysis of historical retirement data using recognized life analysis techniques, and the
forecasting of asset life characteristics. Changes in circumstances, such as technological advances, changes to the Company's business
strategy, changes in the Company's capital strategy or changes in regulations can result in the actual service lives differing from the Company's
estimates.
A change in the remaining service life of a group of assets, or their estimated net salvage value, will affect the depreciation rate used to
amortize the group of assets and thus affect depreciation expense as reported in the Company's results of operations. A change of one year in
the composite service life of the Company's fixed asset base would impact annual depreciation expense by approximately $56 million.
Depreciation studies are a means of ensuring that the assumptions used to estimate the service lives of particular asset groups are still
valid and where they are not, they serve as the basis to establish the new depreciation rates to be used on a prospective basis. In 2019, the
Company completed depreciation studies for track properties and as a result, the Company changed the estimated service lives for various
types of track assets and their related composite depreciation rates. The results of these depreciation studies did not materially affect the
Company's annual depreciation expense.
Given the nature of the railroad and the composition of its network which is made up of homogeneous long-lived assets, it is impractical to
maintain records of specific properties at their lowest unit of property.
Retirements of assets occur through the replacement of an asset in the normal course of business, the sale of an asset or the
abandonment of a section of track. For retirements in the normal course of business, generally the life of the retired asset is within a reasonable
range of the expected useful life, as determined in the depreciation studies, and, as such, no gain or loss is recognized under the group method.
The asset's cost is removed from the asset account and the difference between its cost and estimated related accumulated depreciation (net
of salvage proceeds), if any, is recorded as an adjustment to accumulated depreciation and no gain or loss is recognized. The historical cost of
the retired asset is estimated by using deflation factors or indices that closely correlate to the properties comprising the asset classes in
combination with the estimated age of the retired asset using a first-in, first-out approach, and applying it to the replacement value of the asset.
38 CN | 2019 Annual Report
Management's Discussion and Analysis
In each depreciation study, an estimate is made of any excess or deficiency in accumulated depreciation for all corresponding asset
classes to ensure that the depreciation rates remain appropriate. The excess or deficiency in accumulated depreciation is amortized over the
remaining life of the asset class.
For retirements of depreciable properties that do not occur in the normal course of business, the historical cost, net of salvage proceeds, is
recorded as a gain or loss in income. A retirement is considered not to be in the normal course of business if it meets the following criteria: (i) it
is unusual, (ii) it is significant in amount, and (iii) it varies significantly from the retirement pattern identified through depreciation studies. A
gain or loss is recognized in Other income for the sale of land or disposal of assets that are not part of railroad operations.
For the year ended December 31, 2019, the Company recorded total depreciation expense of $1,559 million (2018 - $1,327 million; 2017 -
$1,279 million). As at December 31, 2019, the Company had Properties of $39,669 million, net of accumulated depreciation of $13,912 million
(2018 - $37,773 million, net of accumulated depreciation of $13,305 million). Additional disclosures are provided in Note 9 – Properties to the
Company's 2019 Annual Consolidated Financial Statements.
GAAP requires the use of historical cost as the basis of reporting in financial statements. As a result, the cumulative effect of inflation,
which has significantly increased asset replacement costs for capital-intensive companies such as CN, is not reflected in operating expenses.
Depreciation charges on an inflation-adjusted basis, assuming that all operating assets are replaced at current price levels, would be
substantially greater than historically reported amounts.
Pensions and other postretirement benefits
The Company's plans have a measurement date of December 31. The following table provides the Company's pension asset, pension liability
and other postretirement benefits liability as at December 31, 2019, and 2018:
In millions
Pension asset
Pension liability
Other postretirement benefits liability
December 31,
2019
336
521
227
$
$
$
2018
446
477
247
$
$
$
The descriptions in the following paragraphs pertaining to pensions relate generally to the Company's main pension plan, the CN Pension
Plan, unless otherwise specified.
Calculation of net periodic benefit cost (income)
In accounting for pensions and other postretirement benefits, assumptions are required for, among other things, the discount rate, the expected
long-term rate of return on plan assets, the rate of compensation increase, health care cost trend rates, mortality rates, employee early
retirements, terminations and disability. Changes in these assumptions result in actuarial gains or losses, which are recognized in Other
comprehensive income (loss). The Company generally amortizes these gains or losses into net periodic benefit cost (income) over the
expected average remaining service life of the employee group covered by the plans only to the extent that the unrecognized net actuarial gains
and losses are in excess of the corridor threshold, which is calculated as 10% of the greater of the beginning-of-year balances of the projected
benefit obligation or market-related value of plan assets. The Company's net periodic benefit cost (income) for future periods is dependent on
demographic experience, economic conditions and investment performance. Recent demographic experience has revealed no material net
gains or losses on termination, retirement, disability and mortality. Experience with respect to economic conditions and investment
performance is further discussed herein.
For the years ended December 31, 2019, 2018 and 2017, the consolidated net periodic benefit cost (income) for pensions and other
postretirement benefits were as follows:
In millions
Year ended December 31,
Net periodic benefit income for pensions
Net periodic benefit cost for other postretirement benefits
2019
(183)
7
$
$
2018
(139)
9
$
$
2017
(190)
7
$
$
As at December 31, 2019 and 2018, the projected pension benefit obligation and accumulated other postretirement benefit obligation were
as follows:
In millions
Projected pension benefit obligation
Accumulated other postretirement benefit obligation
December 31,
2019
18,609
227
$
$
2018
17,275
247
$
$
CN | 2019 Annual Report 39
Management's Discussion and Analysis
Discount rate assumption
The Company's discount rate assumption, which is set annually at the end of each year, is determined by management with the aid of third-
party actuaries. The discount rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality
debt instruments with a rating of AA or better, would provide the necessary cash flows to pay for pension benefits as they become due. For the
Canadian pension and other postretirement benefit plans, future expected benefit payments are discounted using spot rates based on a derived
AA corporate bond yield curve for each maturity year. A year-end discount rate of 3.10% based on bond yields prevailing at December 31, 2019
(2018 - 3.77%) was considered appropriate by the Company.
The Company uses the spot rate approach to measure current service cost and interest cost for all defined benefit pension and other
postretirement benefit plans. Under the spot rate approach, individual spot discount rates along the same yield curve used in the determination
of the projected benefit obligation are applied to the relevant projected cash flows for current service cost at the relevant maturity. More
specifically, current service cost is measured using the cash flows related to benefits expected to be accrued in the following year by active
members of a plan and interest cost is measured using the projected cash flows making up the projected benefit obligation multiplied by the
corresponding spot discount rate at each maturity.
As at December 31, 2019, a 0.25% decrease in the 3.10% discount rate used to determine the projected benefit obligation would have
resulted in a decrease of approximately $570 million to the funded status for pensions and would result in a decrease of approximately $25
million to the 2020 projected net periodic benefit income. A 0.25% increase in the discount rate would have resulted in an increase of
approximately $540 million to the funded status for pensions and would result in an increase of approximately $25 million to the 2020 projected
net periodic benefit income.
Expected long-term rate of return assumption
The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the
investment policy. Consideration is taken of the historical performance, the premium return generated from an actively managed portfolio, as
well as current target asset allocations, published market return expectations, economic developments, inflation rates and administrative
expenses. Based on these factors, the rate is determined by the Company. For 2019, the Company used a long-term rate of return assumption
of 7.00% on the market-related value of plan assets to compute net periodic benefit cost (income). The Company has elected to use a market-
related value of assets, whereby realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are
recognized over a period of five years, while investment income is recognized immediately. In 2020, the Company will maintain the expected
long-term rate of return on plan assets at 7.00% to reflect management's current view of long-term investment returns.
The assets of the Company's various plans are primarily held in separate trust funds ("Trusts") which are diversified by asset type, country,
sector and investment strategy. Each year, the CN Board of Directors reviews and confirms or amends the Statement of Investment Policies and
Procedures ("SIPP") which includes the plans' long-term target asset allocation ("Policy") and related benchmark indices. This Policy is based
on the long-term expectations of the economy and financial market returns and considers the dynamics of the plans' benefit obligations. In
2019, the Policy was amended to affect a target asset allocation change to bonds and mortgages, emerging market debt, private debt, absolute
return, and investment-related liabilities. These changes were taken into account in the determination of the Company's expected long-term rate
of return assumption. In 2019, the Policy was: 3% cash and short-term investments, 35% bonds and mortgages, 1.5% emerging market debt,
1.5% private debt, 40% equities, 4% real estate, 7% oil and gas, 4% infrastructure investments, 10% absolute return investments and negative 6%
for investment-related liabilities.
Annually, the CN Investment Division ("Investment Manager"), a division of the Company created to invest and administer the assets of the
plans, can also implement an investment strategy ("Strategy") which can lead the Plan's actual asset allocation to deviate from the Policy due to
changing market risks and opportunities. The Pension and Investment Committee of the Board of Directors ("Committee") regularly compares
the actual plan asset allocation to the Policy and Strategy and compares the actual performance of the Company's pension plan assets to the
performance of the benchmark indices.
The Committee's approval is required for all major investments in illiquid securities. The SIPP allows for the use of derivative financial
instruments to implement strategies, hedge and adjust existing or anticipated exposures. The SIPP prohibits investments in securities of the
Company or its subsidiaries.
The actual, market-related value and expected rates of return on plan assets for the last five years were as follows:
Actual
Market-related value
Expected
40 CN | 2019 Annual Report
2019
12.2%
6.1%
7.00%
2018
(2.4%)
5.7%
7.00%
2017
9.2%
9.1%
7.00%
2016
4.4%
8.2%
7.00%
2015
5.5%
7.0%
7.00%
Management's Discussion and Analysis
The Company's expected long-term rate of return on plan assets reflects management's view of long-term investment returns and the effect of
a 1% variation in such rate of return would result in a change to the net periodic benefit cost (income) of approximately $100 million.
Management's assumption of the expected long-term rate of return is subject to risks and uncertainties that could cause the actual rate of
return to differ materially from management's assumption. There can be no assurance that the plan assets will be able to earn the expected
long-term rate of return on plan assets.
Net periodic benefit income for pensions for 2020
In 2020, the Company expects net periodic benefit income to be $117 million (2019 - $183 million) for all its defined benefit pension plans.
Plan asset allocation
Based on the fair value of the assets held as at December 31, 2019, the assets of the Company's various plans are comprised of 3% in cash and
short-term investments, 36% in bonds and mortgages, 3% in emerging market debt, 3% in private debt, 37% in equities, 2% in real estate, 5% in
oil and gas, 3% in infrastructure, 10% in absolute return investments, 1% in risk-factor allocation investments and negative 3% in investment-
related liabilities. See Note 15 - Pensions and other postretirement benefits to the Company's 2019 Annual Consolidated Financial Statements
for information on the fair value measurements of such assets.
A significant portion of the plans' assets are invested in publicly traded equity securities whose return is primarily driven by stock market
performance. Debt securities also account for a significant portion of the plans' investments and provide a partial offset to the variation in the
pension benefit obligation that is driven by changes in the discount rate. The funded status of the plan fluctuates with market conditions and
impacts funding requirements. The Company will continue to make contributions to the pension plans that as a minimum meet pension
legislative requirements.
Rate of compensation increase
The rate of compensation increase is determined by the Company based upon its long-term plans for such increases. For 2019, a basic rate of
compensation increase of 2.75% was used to determine the projected benefit obligation and the net periodic benefit cost (income).
Mortality
The Canadian Institute of Actuaries (CIA) published in 2014 a report on Canadian Pensioners' Mortality ("Report"). The Report contained
Canadian pensioners' mortality tables and improvement scales based on experience studies conducted by the CIA. The CIA's conclusions were
taken into account in selecting management's best estimate mortality assumption used to calculate the projected benefit obligation as at
December 31, 2019, 2018 and 2017.
Funding of pension plans
The Company's main Canadian defined benefit pension plan, the CN Pension Plan, accounts for 93% of the Company's pension obligation and
can produce significant volatility in pension funding requirements, given the pension fund's size, the many factors that drive the plan's funded
status, and Canadian statutory pension funding requirements. Adverse changes to the assumptions used to calculate the plan's funding status,
particularly the discount rate used for funding purposes, as well as changes to existing federal pension legislation, regulation and guidance
could significantly impact the Company's future contributions.
For accounting purposes, the funded status is calculated under generally accepted accounting principles for all pension plans. For funding
purposes, the funded status is also calculated under going concern and solvency scenarios as prescribed under pension legislation and subject
to guidance issued by the CIA and the Office of the Superintendent of Financial Institutions (OSFI) for all registered Canadian defined benefit
pension plans. The Company's funding requirements are determined upon completion of actuarial valuations. Actuarial valuations are generally
required on an annual basis for all Canadian defined benefit pension plans, or when deemed appropriate by the OSFI. Actuarial valuations are
also required annually for the Company's U.S. qualified defined benefit pension plans.
The Company's most recently filed actuarial valuations for funding purposes for its Canadian registered defined pension plans conducted
as at December 31, 2018 indicated a funding excess on a going concern basis of approximately $3.3 billion and a funding excess on a solvency
basis of approximately $0.5 billion, calculated using the three-year average of the plans' hypothetical wind-up ratio in accordance with the
Pension Benefit Standards Regulations, 1985. The federal pension legislation requires funding deficits, if any, to be paid over a number of years,
as calculated under current pension regulations. Alternatively, a letter of credit can be subscribed to fulfill required solvency deficit payments.
The OSFI proposed revisions to its Instruction guide for the Preparation of Actuarial Reports for defined benefit pension plans. If these
proposed revisions become final, they would affect the December 31, 2020 actuarial valuations by reducing the solvency status of the
Company’s defined benefit pension plans, and may negatively impact the Company’s pension funding requirements starting in year 2021.
CN | 2019 Annual Report 41
Management's Discussion and Analysis
The Company's next actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans required as at
December 31, 2019 will be performed in 2020. These actuarial valuations are expected to identify a funding excess on a going concern basis of
approximately $3.5 billion, while on a solvency basis a funding excess of approximately $0.5 billion is expected.
Based on the anticipated results of these valuations, the Company expects to make total cash contributions of approximately $135 million
for all of the Company's pension plans in 2020. The Company expects cash from operations and its other sources of financing to be sufficient
to meet its 2020 funding obligations.
Information disclosed by major pension plan
The following table provides the Company's plan assets by category, projected benefit obligation at end of year, as well as Company and
employee contributions by major defined benefit pension plan:
In millions
December 31, 2019
CN
Pension Plan
BC Rail
Pension Plan
U.S. and
other plans
Plan assets by category
Cash and short-term investments
Bonds
Mortgages
Emerging market debt
Private debt
Public equities
Private equities
Real estate
Oil and gas
Infrastructure
Absolute return
Risk-factor allocation
Total investments
Investment-related liabilities (1)
Other (2)
Total plan assets
Projected benefit obligation at end of year
Company contributions in 2019
Employee contributions in 2019
$
$
$
$
$
480
6,140
51
490
469
6,333
210
424
879
603
1,729
283
18,091
(554)
(14)
17,523
17,252
81
64
$
$
$
$
$
16
316
1
8
10
161
4
9
18
12
28
4
587
(9)
1
579
515
—
—
$
$
$
$
$
6
165
—
2
2
115
1
2
4
4
8
1
310
(2)
14
322
842
24
—
$
$
$
$
$
Total
502
6,621
52
500
481
6,609
215
435
901
619
1,765
288
18,988
(565)
1
18,424
18,609
105
64
(1)
Investment-related liabilities include securities sold under repurchase agreements.
(2) Other consists of operating assets of $108 million and liabilities of $107 million required to administer the Trusts' investment assets and the plans' benefit and funding
activities.
Additional disclosures are provided in Note 15 – Pensions and other postretirement benefits to the Company's 2019 Annual Consolidated
Financial Statements.
Personal injury and other claims
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents.
Canada
Employee injuries are governed by the workers' compensation legislation in each province whereby employees may be awarded either a lump
sum or a future stream of payments depending on the nature and severity of the injury. As such, the provision for employee injury claims is
discounted. In the provinces where the Company is self-insured, costs related to employee work-related injuries are accounted for based on
actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party
administration costs. An actuarial study is generally performed at least on a triennial basis. For all other legal actions, the Company maintains,
and regularly updates on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably
estimated based on currently available information.
42 CN | 2019 Annual Report
Management's Discussion and Analysis
In 2019, 2018 and 2017 the Company recorded a decrease of $7 million, and an increase of $4 million and $2 million, respectively, to its
provision for personal injuries in Canada as a result of actuarial valuations for employee injury claims.
As at December 31, 2019, 2018 and 2017, the Company's provision for personal injury and other claims in Canada was as follows:
In millions
Beginning of year
Accruals and other
Payments
End of year
Current portion - End of year
2019
207
29
(29)
207
55
$
$
$
2018
183
52
(28)
207
60
$
$
$
2017
183
38
(38)
183
40
$
$
$
The assumptions used in estimating the ultimate costs for Canadian employee injury claims include, among other factors, the discount rate, the
rate of inflation, wage increases and health care costs. The Company periodically reviews its assumptions to reflect currently available
information. Over the past three years, the Company has not had to significantly change any of these assumptions. Changes in any of these
assumptions could materially affect Casualty and other expense as reported in the Company's results of operations.
For all other legal claims in Canada, estimates are based on the specifics of the case, trends and judgment.
United States
Personal injury claims by the Company's employees, including claims alleging occupational disease and work-related injuries, are subject to the
provisions of the Federal Employers' Liability Act (FELA). Employees are compensated under FELA for damages assessed based on a finding of
fault through the U.S. jury system or through individual settlements. As such, the provision is undiscounted. With limited exceptions where
claims are evaluated on a case-by-case basis, the Company follows an actuarial-based approach and accrues the expected cost for personal
injury, including asserted and unasserted occupational disease claims, and property damage claims, based on actuarial estimates of their
ultimate cost. An actuarial study is performed annually.
For employee work-related injuries, including asserted occupational disease claims, and third-party claims, including grade crossing,
trespasser and property damage claims, the actuarial valuation considers, among other factors, the Company's historical patterns of claims
filings and payments. For unasserted occupational disease claims, the actuarial valuation includes the projection of the Company's experience
into the future considering the potentially exposed population. The Company adjusts its liability based upon management's assessment and the
results of the study. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial valuation with
the current claim experience and, if required, adjustments to the liability are recorded.
Due to the inherent uncertainty involved in projecting future events, including events related to occupational diseases, which include but
are not limited to, the timing and number of actual claims, the average cost per claim and the legislative and judicial environment, the
Company's future payments may differ from current amounts recorded.
In 2019, the Company recorded an increase of $2 million to its provision for U.S. personal injury and other claims attributable to third-party
claims, occupational disease claims and non-occupational disease claims pursuant to the 2019 actuarial valuation. In 2018 and 2017, actuarial
valuations resulted in an increase of $13 million and $15 million, respectively. The prior years' adjustments from the actuarial valuations were
mainly attributable to non-occupational disease claims, third-party claims and occupational disease claims reflecting changes in the Company's
estimates of unasserted claims and costs related to asserted claims. The Company has an ongoing risk mitigation strategy focused on
reducing the frequency and severity of claims through injury prevention and containment; mitigation of claims; and lower settlements of
existing claims.
As at December 31, 2019, 2018 and 2017, the Company's provision for personal injury and other claims in the U.S. was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2019
2018
2017
$
$
$
139
$
116
$
44
(31)
(7)
145
36
$
$
41
(28)
10
139
37
$
$
118
46
(41)
(7)
116
25
For the U.S. personal injury and other claims liability, historical claim data is used to formulate assumptions relating to the expected number of
claims and average cost per claim for each year. Changes in any one of these assumptions could materially affect Casualty and other expense
CN | 2019 Annual Report 43
Management's Discussion and Analysis
as reported in the Company's results of operations. A 5% change in the asbestos average claim cost or a 1% change in the inflation trend rate
for all injury types would result in an increase or decrease in the liability recorded of approximately $2 million.
Environmental matters
Known existing environmental concerns
The Company is or may be liable for remediation costs at individual sites, in some cases along with other potentially responsible parties,
associated with actual or alleged contamination. The ultimate cost of addressing these known contaminated sites cannot be definitively
established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the
contamination; the nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards
governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company estimates the costs related to a particular site
using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the
case of multiple parties, the Company accrues its allocable share of liability taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are
recorded as additional information becomes available.
The Company's provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as
well as monitoring costs. Environmental expenses, which are classified as Casualty and other in the Consolidated Statements of Income,
include amounts for newly identified sites or contaminants as well as adjustments to initial estimates. Recoveries of environmental remediation
costs from other parties are recorded as assets when their receipt is deemed probable.
As at December 31, 2019, 2018 and 2017, the Company's provision for specific environmental sites was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2019
2018
2017
$
$
$
61
31
(34)
(1)
57
38
$
$
$
78
16
(34)
1
61
39
$
$
$
86
16
(23)
(1)
78
57
The Company anticipates that the majority of the liability at December 31, 2019 will be paid out over the next five years. Based on the
information currently available, the Company considers its provisions to be adequate.
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely to be incurred for environmental matters based on known information, the
discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the environment and the Company's
ongoing efforts to identify potential environmental liabilities that may be associated with its properties may result in the identification of
additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future
environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:
•
•
•
•
the lack of specific technical information available with respect to many sites;
the absence of any government authority, third-party orders, or claims with respect to particular sites;
the potential for new or changed laws and regulations and for development of new remediation technologies and uncertainty regarding the
timing of the work with respect to particular sites; and
the determination of the Company's liability in proportion to other potentially responsible parties and the ability to recover costs from any
third parties with respect to particular sites.
Therefore, the likelihood of any such costs being incurred or whether such costs would be material to the Company cannot be determined at
this time. There can thus be no assurance that liabilities or costs related to environmental matters will not be incurred in the future, or will not
have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year, or that the
Company's liquidity will not be adversely impacted by such liabilities or costs, although management believes, based on current information,
that the costs to address environmental matters will not have a material adverse effect on the Company's financial position or liquidity. Costs
related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
44 CN | 2019 Annual Report
Management's Discussion and Analysis
Future occurrences
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of hazardous
materials, may occur that could cause harm to human health or to the environment. As a result, the Company may incur costs in the future,
which may be material, to address any such harm, compliance with laws and other risks, including costs relating to the performance of clean-
ups, payment of environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
Regulatory compliance
The Company may incur significant capital and operating costs associated with environmental regulatory compliance and clean-up
requirements, in its railroad operations and relating to its past and present ownership, operation or control of real property. Environmental
expenditures that relate to current operations are expensed unless they relate to an improvement to the property. Expenditures that relate to an
existing condition caused by past operations and which are not expected to contribute to current or future operations are expensed. Operating
expenses related to regulatory compliance activities for environmental matters for the year ended December 31, 2019 amounted to $25 million
(2018 - $22 million; 2017 - $20 million). For 2020, the Company expects to incur operating expenses relating to environmental matters in the
same range as 2019. In addition, based on the results of its operations and maintenance programs, as well as ongoing environmental audits
and other factors, the Company plans for specific capital improvements on an annual basis. Certain of these improvements help ensure
facilities, such as fueling stations, waste water and storm water treatment systems, comply with environmental standards and include new
construction and the updating of existing systems and/or processes. Other capital expenditures relate to assessing and remediating certain
impaired properties. The Company's environmental capital expenditures for the year ended December 31, 2019 amounted to $25 million (2018 -
$19 million; 2017 - $21 million). For 2020, the Company expects to incur capital expenditures relating to environmental matters in the same
range as 2019.
Business risks
In the normal course of business, the Company is exposed to various business risks and uncertainties that can have an effect on the
Company's results of operations, financial position, or liquidity. While some exposures may be reduced by the Company's risk management
strategies, many risks are driven by external factors beyond the Company's control or are of a nature which cannot be eliminated. The key areas
of business risks and uncertainties described in this section are not the only ones that can affect the Company. Additional risks and
uncertainties not currently known to management or that may currently not be considered material by management, could nevertheless also
have an adverse effect on the Company's business.
Competition
The Company faces significant competition, including from rail carriers and other modes of transportation, and is also affected by its
customers' flexibility to select among various origins and destinations, including ports, in getting their products to market. Specifically, the
Company faces competition from Canadian Pacific Railway Company (CP), which operates the other major rail system in Canada and services
most of the same industrial areas, commodity resources and population centers as the Company; major U.S. railroads and other Canadian and
U.S. railroads; long-distance trucking companies, transportation via the St. Lawrence-Great Lakes Seaway and the Mississippi River and
transportation via pipelines. In addition, while railroads must build or acquire and maintain their rail systems, motor carriers and barges are able
to use public rights-of-way that are built and maintained by public entities without paying fees covering the entire costs of their usage.
Competition is generally based on the quality and the reliability of the service provided, access to markets, as well as price. Factors
affecting the competitive position of customers, including exchange rates and energy cost, could materially adversely affect the demand for
goods supplied by the sources served by the Company and, therefore, the Company's volumes, revenues and profit margins. Factors affecting
the general market conditions for the Company's customers can result in an imbalance of transportation capacity relative to demand. An
extended period of supply/demand imbalance could negatively impact market rate levels for all transportation services, and more specifically
the Company's ability to maintain or increase rates. This, in turn, could materially and adversely affect the Company's business, results of
operations or financial position.
The level of consolidation of rail systems in the U.S. has resulted in larger rail systems that are in a position to compete effectively with the
Company in numerous markets.
There can be no assurance that the Company will be able to compete effectively against current and future competitors in the
transportation industry, or that further consolidation within the transportation industry and legislation allowing for more leniency in size and
weight for motor carriers will not adversely affect the Company's competitive position. No assurance can be given that competitive pressures
will not lead to reduced revenues, profit margins or both.
CN | 2019 Annual Report 45
Management's Discussion and Analysis
Environmental matters
The Company's operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada
and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances and other materials; decommissioning of underground and aboveground storage
tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in railroad and related transportation operations; real
estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations. As a
result, the Company incurs significant operating and capital costs, on an ongoing basis, associated with environmental regulatory compliance
and clean-up requirements in its railroad operations and relating to its past and present ownership, operation or control of real property.
While the Company believes that it has identified the costs likely to be incurred for environmental matters in the next several years based
on known information, the discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the
environment and the Company's ongoing efforts to identify potential environmental liabilities that may be associated with its properties may
result in the identification of additional environmental liabilities and related costs.
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of
hazardous materials, may occur that could cause harm to human health or to the environment. In addition, the Company is also exposed to
potential catastrophic liability risk, faced by the railroad industry generally, in connection with the transportation of toxic inhalation hazard
materials such as chlorine and anhydrous ammonia, or other dangerous commodities such as crude oil and propane that the Company may be
required to transport as a result of its common carrier obligations. Therefore, the Company may incur costs in the future, which may be
material, to address any such harm, compliance with laws or other risks, including costs relating to the performance of clean-ups, payment of
environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
The environmental liability for any given contaminated site varies depending on the nature and extent of the contamination; the available
clean-up techniques; evolving regulatory standards governing environmental liability; and the number of potentially responsible parties and their
financial viability. As such, the ultimate cost of addressing known contaminated sites cannot be definitively established. Also, additional
contaminated sites yet unknown may be discovered or future operations may result in accidental releases.
While some exposures may be reduced by the Company's risk mitigation strategies (including periodic audits, employee training programs,
emergency plans and procedures, and insurance), many environmental risks are driven by external factors beyond the Company's control or are
of a nature which cannot be completely eliminated. Therefore, there can be no assurance, notwithstanding the Company's mitigation strategies,
that liabilities or costs related to environmental matters will not be incurred in the future or that environmental matters will not have a material
adverse effect on the Company's results of operations, financial position or liquidity, or reputation.
Personal injury and other claims
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease, and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents. The Company maintains provisions for such items, which it considers to be adequate for all of its
outstanding or pending claims and benefits from insurance coverage for occurrences in excess of certain amounts. The final outcome with
respect to actions outstanding or pending at December 31, 2019, or with respect to future claims, cannot be predicted with certainty, and
therefore there can be no assurance that their resolution will not have a material adverse effect on the Company's results of operations,
financial position or liquidity, in a particular quarter or fiscal year.
Labor negotiations
As at December 31, 2019, CN employed a total of 18,726 employees in Canada, of which 13,447, or 72%, were unionized employees and 7,249
employees in the U.S., of which 6,111, or 84%, were unionized employees. The Company's relationships with its unionized workforce are
governed by, amongst other items, collective agreements which are negotiated from time to time. Disputes relating to the renewal of collective
agreements could potentially result in strikes, slowdowns and loss of business. Future labor agreements or renegotiated agreements could
increase labor and fringe benefits and related expenses. There can be no assurance that the Company will be able to renew and have its
collective agreements ratified without any strikes or lockouts or that the resolution of these collective bargaining negotiations will not have a
material adverse effect on the Company's results of operations or financial position.
Canadian workforce
On February 5, 2019, the collective agreement with the United Steelworkers governing track and bridge workers was ratified by its members,
renewing the collective agreement for a five-year term expiring on December 31, 2023.
On March 22, 2019, CN received notice to commence collective bargaining with the Teamsters Canada Rail Conference (TCRC) to renew
the collective agreements covering conductors and yard service employees. On June 26, 2019, the Minister of Labour appointed conciliators to
46 CN | 2019 Annual Report
Management's Discussion and Analysis
assist the parties in their negotiations. On August 23, 2019, the parties agreed to extend the conciliation period. On November 19, 2019, the
TCRC initiated strike action and on November 26, 2019 a tentative agreement was reached to renew the collective agreements. On January 31,
2020, the collective agreements were ratified by its members, renewing the collective agreements for a three-year term, retroactive from July
23, 2019.
On May 10, 2019, the collective agreements with Unifor for three bargaining units covering clerical and intermodal employees, and other
classifications, were ratified by its members, renewing the collective agreements for a 45-month term expiring on December 31, 2022.
On October 2, 2019, subsequent to the tentative agreement reached with Unifor to renew the collective agreement governing owner-
operator truck drivers which was rejected by the membership on May 10, 2019, a revised agreement was ratified by its members, renewing that
collective agreement through December 31, 2023.
On June 14, 2019, the collective agreement with the TCRC governing rail traffic controllers was ratified by its members, renewing the
collective agreements for a four-year term expiring on December 31, 2022.
The Company's collective agreements remain in effect until the bargaining process outlined under the Canada Labour Code has been
exhausted.
U.S. workforce
As of January 31, 2020, collective agreements covering all non-operating and operating craft employees at Grand Trunk Western Railroad
Company (GTW), companies owned by Illinois Central Corporation (ICC), companies owned by Wisconsin Central Ltd. (WC) and Bessemer &
Lake Erie Railroad Company (BLE), and all employees at Pittsburgh and Conneaut Dock Company (PCD) were ratified. The tentative agreement
covering the laborers represented by the United Steelworkers at PCD was reached on December 23, 2019 and was ratified by its members on
December 27, 2019. Agreements in place have various moratorium provisions, which preserve the status quo in respect of the given collective
agreement during the terms of such moratoriums. Where negotiations are ongoing, the terms and conditions of existing agreements generally
continue to apply until new agreements are reached or the processes of the Railway Labor Act have been exhausted.
The general approach to labor negotiations by U.S. Class I railroads is to bargain on a collective national basis with the industry, which
GTW, ICC, WC and BLE currently participate in, for collective agreements covering all non-operating and operating employees. The next national
bargaining round has commenced.
Regulation
Economic regulation – Canada
The Company's rail operations in Canada are subject to economic regulation by the Canadian Transportation Agency under the Canada
Transportation Act, which provides rate and service remedies, including final offer arbitration, long-haul interswitching rates and mandatory
interswitching. It also regulates the maximum revenue entitlement for the movement of regulated grain, charges for railway ancillary services
and noise-related disputes. In addition, various Company business transactions must gain prior regulatory approval, with attendant risks and
uncertainties, and the Company is subject to government oversight with respect to rate, service and business practice issues.
No assurance can be given that any current or future regulatory or legislative initiatives by the Canadian federal government and agencies will
not materially adversely affect the Company's results of operations or its competitive and financial position.
Economic regulation – U.S.
The Company's U.S. rail operations are subject to economic regulation by the STB. The STB serves as both an adjudicatory and regulatory body
and has jurisdiction over certain railroad rate and service issues and rail restructuring transactions such as mergers, line sales, line construction
and line abandonments. As such, various Company business transactions must gain prior regulatory approval and aspects of its pricing and
service practices may be subject to challenge, with attendant risks and uncertainties. Recent proceedings undertaken by the STB in a number of
significant matters remain pending.
The rail industry had previously challenged as unconstitutional Congress’ delegation in the Passenger Rail Investment and Improvement
Act of 2008 (PRIIA) to Amtrak and the Federal Railroad Administration (FRA) of joint authority to promulgate the PRIIA performance standards.
On March 23, 2017, the U.S. District Court for the District of Columbia concluded that Section 207 of PRIIA was void and unconstitutional and
vacated the performance standards. The Government defendants challenged this decision in the U.S. Court of Appeals for the District of
Columbia. On July 20, 2018, the U.S. Court of Appeals for the District of Columbia Circuit reversed the judgment of the District Court and held
that the constitutional defect could be appropriately remedied by severing the arbitration provision in Section 207(d). The U.S. Court of Appeals
noted that the aspect of the District Court’s decision that vacated the performance standards is final because the Government defendants did
not challenge it on appeal. On October 24, 2018, the U.S. Court of Appeals denied the rail industry's petition for rehearing. On June 3, 2019, the
U.S. Supreme Court denied the rail industry’s petition for review. As part of PRIIA, U.S. Congress authorized the STB to investigate any railroad
CN | 2019 Annual Report 47
Management's Discussion and Analysis
over whose track Amtrak operates that fails to meet heightened performance standards preference to Amtrak, the STB is authorized to assess
damages against the host railroad.
On August 8, 2019, the STB issued interim findings and guidance to National Railroad Passenger Corporation (Amtrak) and the Company
regarding the terms and conditions for Amtrak’s use of the Company’s lines. The STB ordered Board-sponsored mediation.
In 2019, the STB proposed rules and policy statements and received comments related to the reporting of rail service data, the agency’s
methodology for determining the rail industry’s cost of capital, and rate reasonableness standards, in addition to issuing proposals concerning
demurrage and accessorial charges. The STB held a hearing to receive comments on a report concerning revenue adequacy and received
additional comments in the proceeding relating to the STB's prior notice of proposed rulemaking to revoke previously granted exemptions of
five commodities from regulatory oversight.
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the U.S. federal government and
agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
Safety regulation – Canada
The Company's rail operations in Canada are subject to safety regulation by the Minister under the Railway Safety Act as well as the rail portions
of other safety-related statutes, which are administered by Transport Canada. The Company may be required to transport toxic inhalation
hazard materials as a result of its common carrier obligations and, as such, is exposed to additional regulatory oversight in Canada. The
Transportation of Dangerous Goods Act, also administered by Transport Canada, establishes the safety requirements for the transportation of
goods classified as dangerous and enables the adoption of regulations for security training and screening of personnel working with dangerous
goods, as well as the development of a program to require a transportation security clearance for dangerous goods, the tracking of dangerous
goods during transport and the development of an emergency response plan.
In 2014, Transport Canada's new Grade Crossings Regulations under the Railway Safety Act came into force, which establish specific
standards for new grade crossings and requirements that existing crossings be upgraded to basic safety standards by November 2021, as well
as safety related data that must be provided by railway companies on an annual basis. The Company has complied with the information
requirements by providing road authorities with specific information respecting public grade crossings. The Company has also initiated the
work required to have grade crossings on its network to meet the new standards.
On April 26, 2017, the Minister initiated the review of the Railway Safety Act, which was initially scheduled for 2018, and a panel of three
persons was appointed to proceed with the review. On May 31, 2018, the Minister tabled in the House of Commons the report of the three-
person panel. The Minister has not indicated how and when he will answer to the panel's report.
Transport Canada's new regulations aimed at lowering the risk of terrorism on the Canadian rail system, entitled Transportation of
Dangerous Goods by Rail Security Regulations were adopted on May 6, 2019 but are coming into force in sequence. The provisions under which
rail carriers have to conduct security inspections of certain railway vehicles containing dangerous goods, report potential security threats and
concerns to the Canadian Transport Emergency Centre, and employ a rail security coordinator are in force since August 6, 2019. The
requirements that all rail carriers proactively engage in security planning processes and manage security risks, by introducing security
awareness training for employees, security plans that include measures to address assessed risks, and security plan training for employees
with duties related to the security plan or security sensitive dangerous goods will come into force on February 6, 2020.
Bill C-49, which came into force on May 23, 2018, contains provisions that amend the Railway Safety Act to prohibit a railway company
from operating railway equipment unless the equipment is fitted with prescribed recording instruments and prescribed information is recorded
using those instruments, collected and preserved. These changes are not yet in force as regulations detailing their conditions must first be
enacted by Transport Canada. On May 24, 2019, Transport Canada published the proposed Locomotive Voice and Video Recorder Regulations
("LVVR") and invited interested parties to comment by July 24, 2019. The LVVR draft regulations, to be adopted pursuant to the Transportation
Modernization Act (Bill C-49), will require railway companies to procure and install LVVR equipment within two years after their coming into
force. The LVVR regulations set out the technical specifications of the equipment, deal with record keeping, provide for privacy protection and
detail how railway companies can access the information on a random basis. LVVR technology will assist in preventing accidents and facilitate
investigations to better understand the circumstances of accidents. On July 24, 2019, CN provided its submission. Transport Canada is
expected to issue a revised version of the proposed regulations when all comments have been reviewed.
On December 20, 2018, the Minister issued an order requesting Canadian railway companies to revise the Work/Rest Rules under the
Railway Safety Act to reflect the latest fatigue science and fatigue management practices and address a series of related elements.
On April 13, 2019, Transport Canada published proposed new Passenger Rail Security Regulations, these regulations would require
passenger railway and host companies to effectively manage their security risks by implementing risk-based security practices, including
security awareness training, security risk assessments, security plans, security plan training, the designation of a rail security coordinator,
security inspections, security exercises and security incident reporting.
48 CN | 2019 Annual Report
Management's Discussion and Analysis
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the Canadian federal government
and agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
Safety regulation – U.S.
The Company's U.S. rail operations are subject to safety regulation by the FRA under the Federal Railroad Safety Act as well as rail portions of
other safety statutes, with the transportation of certain hazardous commodities also governed by regulations promulgated by the Pipeline and
Hazardous Materials Safety Administration (PHMSA). PHMSA requires carriers operating in the U.S. to report annually the volume and route-
specific data for cars containing these commodities; conduct a safety and security risk analysis for each used route; identify a commercially
practicable alternative route for each used route; and select for use the practical route posing the least safety and security risk. In addition, the
Transportation Security Administration (TSA) requires rail carriers to provide upon request, within five minutes for a single car and 30 minutes
for multiple cars, location and shipping information on cars on their networks containing toxic inhalation hazard materials and certain
radioactive or explosive materials; and ensure the secure, attended transfer of all such cars to and from shippers, receivers and other carriers
that will move from, to, or through designated high-threat urban areas.
On October 16, 2008, the U.S. Congress enacted the Rail Safety Improvement Act of 2008, which required all Class I railroads and intercity
passenger and commuter railroads to implement a PTC system by December 31, 2015 on mainline track where intercity passenger railroads
and commuter railroads operate and where toxic inhalation hazard materials of certain thresholds are transported. PTC is a collision avoidance
technology designed to override locomotive controls and prevent train-to-train collisions, overspeed derailments, misaligned switch derailments,
and unauthorized incursions onto established work zones. Pursuant to the Positive Train Control Enforcement and Implementation Act of 2015
and the FAST Act of 2015, Congress extended the PTC installation deadline until December 31, 2018, with the option for a railroad carrier to
complete full implementation by no later than December 31, 2020, provided certain milestones were met by the end of 2018. In 2018, the
Company completed the milestones required for the extension and the FRA has approved the extension for the Company to complete full
implementation by December 31, 2020. CN has received conditional FRA approval to conduct PTC revenue operation, which enables
interoperability testing with other railroads. The FRA is reviewing CN's PTC Safety Plan. In 2019, CN initiated PTC revenue operation on its
remaining subdivisions where PTC is required and began interoperability testing with tenant railroads. Noncompliance with these or other laws
and regulations may subject the Company to fines, penalties and/or service interruptions. The implementation of PTC will result in additional
capital expenditures and operating costs. In order to implement PTC, the Company has invested in various information technology applications,
including back office systems, aimed to enhance the reliability of PTC operations. The Company continues to evaluate the technical and
operational merits of its information technology applications. In the event that such evaluations lead to the identification of better or more
reliable technology, the Company may consider implementing such technology, which may result in additional costs. PTC may result in reduced
operational efficiency and service levels.
On February 28, 2019, in coordination with the FRA, PHMSA issued a final rule for oil spill response plans and information sharing for high-
hazard flammable trains for the purpose of improving oil spill response readiness and mitigating the effects of oil-related rail incidents. On
March 29, 2019, the Association of American Railroads sought reconsideration from PHMSA of certain aspects of the final rule. On May 29,
2019, PHMSA denied the request for reconsideration.
No assurance can be given that these and any other current or future regulatory or legislative initiatives by the U.S. federal government and
agencies will not materially adversely affect the Company's results of operations or its competitive and financial position.
Regulation – Vessels
The Company's vessel operations are subject to regulation by the U.S. Coast Guard and the Department of Transportation, Maritime
Administration, which regulate the ownership and operation of vessels operating on the Great Lakes and in U.S. coastal waters. In addition, the
Environmental Protection Agency has authority to regulate air emissions from these vessels.
CN | 2019 Annual Report 49
Management's Discussion and Analysis
Security
The Company is subject to statutory and regulatory directives in the U.S. addressing homeland security concerns. In the U.S., safety matters
related to security are overseen by the TSA, which is part of the U.S. Department of Homeland Security (DHS) and PHMSA, which, like the FRA,
is part of the U.S. Department of Transportation. Border security falls under the jurisdiction of U.S. Customs and Border Protection (CBP), which
is part of the DHS. In Canada, the Company is subject to regulation by the Canada Border Services Agency (CBSA). Matters related to
agriculture-related shipments crossing the Canada/U.S. border also fall under the jurisdiction of the U.S. Department of Agriculture (USDA) and
the Food and Drug Administration (FDA) in the U.S. and the Canadian Food Inspection Agency (CFIA) in Canada. More specifically, the Company
is subject to:
•
•
•
•
•
border security arrangements, pursuant to an agreement the Company and CP entered into with the CBP and the CBSA;
the CBP's Customs-Trade Partnership Against Terrorism (C-TPAT) program and designation as a low-risk carrier under CBSA's Customs
Self-Assessment (CSA) program;
regulations imposed by the CBP requiring advance notification by all modes of transportation for all shipments into the U.S. The CBSA is
also working on similar requirements for Canada-bound traffic;
inspection for imported fruits and vegetables grown in Canada and the agricultural quarantine and inspection (AQI) user fee for all traffic
entering the U.S. from Canada; and
gamma ray screening of cargo entering the U.S. from Canada, and potential security and agricultural inspections at the Canada/U.S.
border.
The Company has worked with the AAR to develop and put in place an extensive industry-wide security plan to address terrorism and security-
driven efforts by state and local governments seeking to restrict the routings of certain hazardous materials. If such state and local routing
restrictions were to go into force, they would be likely to add to security concerns by foreclosing the Company's most optimal and secure
transportation routes, leading to increased yard handling, longer hauls, and the transfer of traffic to lines less suitable for moving hazardous
materials, while also infringing upon the exclusive and uniform federal oversight over railroad security matters.
While the Company will continue to work closely with the CBSA, CBP, and other Canadian and U.S. agencies, as described above, no assurance
can be given that these and future decisions by the U.S., Canadian, provincial, state, or local governments on homeland security matters,
legislation on security matters enacted by the U.S. Congress or Parliament, or joint decisions by the industry in response to threats to the North
American rail network, will not materially adversely affect the Company's results of operations, or its competitive and financial position.
Transportation of hazardous materials
As a result of its common carrier obligations, the Company is legally required to transport toxic inhalation hazard materials regardless of risk or
potential exposure or loss. A train accident involving the transport of these commodities could result in significant costs and claims for
personal injury, property damage, and environmental penalties and remediation in excess of insurance coverage for these risks, which may
materially adversely affect the Company's results of operations, or its competitive and financial position.
Economic conditions
The Company is susceptible to changes in the economic conditions of the industries and geographic areas that produce and consume the
freight it transports or the supplies it requires to operate. In addition, many of the goods and commodities carried by the Company experience
cyclicality in demand. For example, the volatility in domestic and global energy markets could impact the demand for transportation services as
well as impact the Company's fuel costs and surcharges. In addition, the volatility in other commodity markets such as coal and iron ore could
have an impact on volumes. Many of the bulk commodities the Company transports move offshore and are affected more by global rather than
North American economic conditions. Adverse North American and global economic conditions, or economic or industrial restructuring, that
affect the producers and consumers of the commodities carried by the Company, including customer insolvency, may have a material adverse
effect on the volume of rail shipments and/or revenues from commodities carried by the Company, and thus materially and negatively affect its
results of operations, financial position, or liquidity.
50 CN | 2019 Annual Report
Management's Discussion and Analysis
Pension funding volatility
The Company's funding requirements for its defined benefit pension plans are determined using actuarial valuations. See the section of this
MD&A entitled Critical accounting estimates – Pensions and other postretirement benefits for information relating to the funding of the
Company's defined benefit pension plans. Adverse changes with respect to pension plan returns and the level of interest rates as well as
changes to existing federal pension legislation and regulation may significantly impact future pension contributions and have a material
adverse effect on the funding status of the plans and the Company's results of operations. The OSFI proposed revisions to its Instruction guide
for the Preparation of Actuarial Reports for defined benefit pension plans. This will affect the December 31, 2020 actuarial valuations by
reducing the solvency status of the Company’s defined benefit pension plans, and may negatively impact the Company’s pension funding
requirements starting in year 2021.
There can be no assurance that the Company's pension expense and funding of its defined benefit pension plans will not increase in the future
and thereby negatively impact earnings and/or cash flow.
Reliance on technology and related cybersecurity risk
The Company relies on information technology in all aspects of its business. While the Company has business continuity and disaster recovery
plans, as well as other security and mitigation programs in place to protect its operations, information and technology assets, a cybersecurity
attack and significant disruption or failure of its information technology and communications systems could result in service interruptions,
safety failures, security violations, regulatory compliance failures or other operational difficulties, leading to possible litigation and regulatory
oversight. Security threats are evolving, and can come from nation states, organized criminals, hacktivists and others with malicious intent. A
security incident could compromise corporate information and assets, as well as operations. If the Company is unable to restore service or to
acquire or implement any needed new technology, it may suffer a competitive disadvantage, which could also have an adverse effect on the
Company's results of operations, financial position or liquidity. The Company is investing to meet evolving network and data security
expectations and regulations, in an effort to mitigate the impact a security incident might have on the Company's results of operations, financial
position or liquidity. The final outcome of a potential security incident cannot be predicted with certainty, and therefore there can be no
assurance that its resolution will not have a material adverse effect on the Company's reputation, goodwill, results of operations, financial
position or liquidity, in a particular quarter or fiscal year.
Trade restrictions
Global as well as North American trade conditions, including trade barriers on certain commodities, may interfere with the free circulation of
goods across Canada and the U.S. or the cost associated therewith. Following the expiration of the Softwood Lumber Agreement (SLA)
between Canada and the U.S., including the expiration of the one year moratorium period preventing the U.S. from launching any trade action
against Canadian producers, on January 3, 2018, based on affirmative final determinations by both the U.S. Department of Commerce and the
U.S. International Trade Commission, antidumping and countervailing duty orders were imposed on imports of Canadian softwood lumber to
the U.S., which Canada responded to the imposition by the U.S. of antidumping and countervailing duties, in connection with lumber and other
commodities, by filing a complaint with the World Trade Organization (WTO). In June 2019, Canada appealed the WTO panel ruling of April 2019
that allowed the U.S. to continue to use their current methodology to calculate anti-dumping tariffs on lumber.
On November 30, 2018, the U.S., Canada and Mexico signed the United States-Mexico-Canada Agreement (USMCA), a new trade
agreement to replace the North American Free Trade Agreement, which was subject to ratification by the legislature of Canada and the U.S.,
with Mexico having ratified it on June 19, 2019. On May 17, 2019, Canada and the U.S. reached an understanding on tariffs of steel and
aluminum to eliminate all tariffs the U.S. imposed on Canadian imports of steel and aluminum, and all tariffs Canada imposed in retaliation for
the action taken by the U.S. On December 10, 2019, Canada, U.S. and Mexico announced that an agreement had been reached on the remaining
provisions to implement the USMCA. The revised USMCA is still subject to the remaining ratification of the legislature of Canada.
It remains too early to assess the potential outcome of other ongoing various trade actions taken by governments and agencies. As such,
there can be no assurance that trade actions will not materially adversely affect the volume of rail shipments and/or revenues from
commodities carried by the Company, and thus materially and negatively impact earnings and/or cash flow.
Terrorism and international conflicts
Potential terrorist actions can have a direct or indirect impact on the transportation infrastructure, including railway infrastructure in North
America, and can interfere with the free flow of goods. Rail lines, facilities and equipment could be directly targeted or become indirect
casualties, which could interfere with the free flow of goods. International conflicts can also have an impact on the Company's markets.
Government response to such events could adversely affect the Company's operations. Insurance premiums could also increase significantly or
coverage could become unavailable.
CN | 2019 Annual Report 51
Management's Discussion and Analysis
Customer credit risk
In the normal course of business, the Company monitors the financial condition and credit limits of its customers and reviews the credit history
of each new customer. Although the Company believes there are no significant concentrations of credit risk, economic conditions can affect
the Company's customers and can result in an increase to the Company's credit risk and exposure to the business failures of its customers. A
widespread deterioration of customer credit and/or business failures of customers could have a material adverse effect on the Company's
results of operations, financial position or liquidity.
Liquidity
Disruptions in financial markets or deterioration of the Company's credit ratings could hinder the Company's access to external sources of
funding to meet its liquidity needs. There can be no assurance that changes in the financial markets will not have a negative effect on the
Company's liquidity and its access to capital at acceptable terms and rates.
Supplier concentration
The Company operates in a capital-intensive industry where the complexity of rail equipment limits the number of suppliers available. The
supply market could be disrupted if changes in the economy caused any of the Company's suppliers to cease production or to experience
capacity or supply shortages. The supply market could become further concentrated and could result in changes to the product or service
offerings by suppliers. This could also result in cost increases to the Company and difficulty in obtaining and maintaining the Company's rail
equipment and materials. Since the Company also has foreign suppliers, international relations, trade restrictions and global economic and
other conditions may potentially interfere with the Company's ability to procure necessary equipment and materials. Widespread business
failures of, or restrictions on suppliers, could have a material adverse effect on the Company's results of operations or financial position.
Availability of qualified personnel
The Company may experience demographic challenges in the employment levels of its workforce. Changes in employee demographics, training
requirements and the availability of qualified personnel, particularly locomotive engineers and conductors, could negatively impact the
Company's ability to meet demand for rail service. The Company monitors employment levels and seeks to ensure that there is an adequate
supply of personnel to meet rail service requirements. However, the Company's efforts to attract and retain qualified personnel may be hindered
by specific conditions in the job market. No assurance can be given that demographic or other challenges will not materially adversely affect
the Company's results of operations or its financial position.
Fuel costs
The Company is susceptible to the volatility of fuel prices due to changes in the economy or supply disruptions. Fuel shortages can occur due
to refinery disruptions, production quota restrictions, climate, and labor and political instability. Increases in fuel prices or supply disruptions
may materially adversely affect the Company's results of operations, financial position or liquidity.
Foreign exchange
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and other currencies (including the US dollar) make the goods transported by the Company more or less
competitive in the world marketplace and thereby may adversely affect the Company's revenues and expenses.
Interest rates
The Company is exposed to interest rate risk relating to the Company's debt. The Company mainly issues fixed-rate debt, which exposes the
Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the Company to
variability in interest expense. Adverse changes to market interest rates may significantly impact the fair value or future cash flows of the
Company's financial instruments. There can be no assurance that changes in the market interest rates will not have a negative effect on the
Company's results of operations or liquidity.
Transportation network disruptions
Due to the integrated nature of the North American freight transportation infrastructure, the Company's operations may be negatively affected
by service disruptions of other transportation links such as ports and other railroads which interchange with the Company. A significant
prolonged service disruption of one or more of these entities could have an adverse effect on the Company's results of operations, financial
position or liquidity. Furthermore, deterioration in the cooperative relationships with the Company's connecting carriers could directly affect the
Company's operations.
52 CN | 2019 Annual Report
Management's Discussion and Analysis
Severe weather
The Company's success is dependent on its ability to operate its railroad efficiently. Severe weather and natural disasters, such as extreme cold
or heat, flooding, droughts, fires, hurricanes and earthquakes, can disrupt operations and service for the railroad, affect the performance of
locomotives and rolling stock, as well as disrupt operations for both the Company and its customers. Business interruptions resulting from
severe weather could result in increased costs, increased liabilities and lower revenues, which could have a material adverse effect on the
Company's results of operations, financial condition or liquidity.
Climate change
Climate change, including the impacts of global warming, has the potential physical risks of increasing the frequency of adverse weather
events, which can disrupt the Company's operations and damage its infrastructure or properties. It could also affect the markets for, or the
volume of, the goods the Company carries or otherwise have a material adverse effect on the Company's results of operations, financial
position or liquidity. Government action or inaction to address climate change could also affect CN. The Company is currently subject to climate
change and other emissions-related laws and regulations that have been proposed and, in some cases adopted, on the federal, provincial and
state levels. While CN is continually focused on efficiency improvements and reducing its carbon footprint, cap and trade systems, carbon
taxes, or other controls on emissions of greenhouse gasses imposed by various government bodies could increase the Company's capital and
operating costs. The Company may not be able to offset such impacts, including, for example, through higher freight rates. Climate change
legislation and regulation could also affect CN's customers; make it difficult for CN's customers to produce products in a cost-competitive
manner due to increased energy costs; and increase legal costs related to defending and resolving legal claims and other litigation related to
climate change.
Controls and procedures
The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2019, have concluded that the Company's
disclosure controls and procedures were effective.
During the fourth quarter ended December 31, 2019, there was no change in the Company's internal control over financial reporting that
has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
As of December 31, 2019, management has assessed the effectiveness of the Company's internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013).
Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of
December 31, 2019, and issued Management's Report on Internal Control over Financial Reporting dated January 31, 2020 to that effect.
CN | 2019 Annual Report 53
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013).
Based on this assessment, management has determined that the Company's internal control over financial reporting was effective as of
December 31, 2019.
KPMG LLP, an independent registered public accounting firm, has issued an unqualified audit report on the effectiveness of the Company's
internal control over financial reporting as of December 31, 2019 and has also expressed an unqualified audit opinion on the Company's 2019
consolidated financial statements as stated in their Reports of Independent Registered Public Accounting Firm dated January 31, 2020.
(s) Jean-Jacques Ruest
President and Chief Executive Officer
January 31, 2020
(s) Ghislain Houle
Executive Vice-President and Chief Financial Officer
January 31, 2020
54 CN | 2019 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Canadian National Railway Company:
Opinion on the consolidated financial statements
We have audited the accompanying consolidated balance sheets of Canadian National Railway Company (the "Company") as of December 31,
2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for
each of the years in the three‐year period ended December 31, 2019, and the related notes (collectively, the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‐year period ended
December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the
Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated January 31, 2020
expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of
January 1, 2019 due to the adoption of Accounting Standards Codification Topic 842 Leases, using a modified retrospective adoption
approach.
Basis for opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to
the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.
Evaluation of income taxes
As discussed in Note 6 to the consolidated financial statements, the net deferred income tax liability was $7,844 million as of December 31,
2019 and income tax expense was $1,213 million for the year ended December 31, 2019. The Company operates in different tax jurisdictions
which requires the Company to make significant judgments and estimates in relation to its tax positions.
We identified the evaluation of the net deferred income tax liability and income tax expense as a critical audit matter due to the magnitude
of these tax balances and complexities in the evaluation of the application of the relevant tax regulations applicable to the Company. A higher
degree of auditor judgment is required in assessing certain of the Company’s tax positions and balances.
CN | 2019 Annual Report 55
Report of Independent Registered Public Accounting Firm
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over
the Company’s income tax accounting process, including controls related to the Company’s reconciliation and analysis of its deferred income
tax balances. We involved income tax and transfer pricing professionals with specialized skills and knowledge to assist in: (1) assessing the
Company’s interpretation of the relevant tax regulations, including the impact of the U.S. Tax Cuts and Jobs Act; (2) evaluating the Company’s
tax positions and transfer pricing arrangements; (3) analyzing the Company’s deferred income tax balances by comparing prior year tax
estimates to actual tax returns filed, and evaluating the Company’s reconciliation of the deferred income tax balances to the underlying
temporary differences.
Evaluation of capitalization of costs relating to track and railway infrastructure and depreciation related to properties
As discussed in Notes 1 and 9 to the consolidated financial statements, capital additions were $3,865 million for the year ended December 31,
2019, of which $1,489 million related to track and railway infrastructure maintenance, including the replacement of rail, ties, bridge
improvements, and other general track maintenance. For self-constructed properties, expenditures include direct material, labor, and contracted
services, as well as other allocated costs. The Company follows the group method of depreciation whereby a single composite depreciation
rate is applied to the gross investment in a class of similar assets. These Notes also discussed that depreciation expense relating to properties
was $1,559 million for the year ended December 31, 2019. The Company performs comprehensive Canadian and U.S. depreciation studies on
specific asset groups on a periodic basis, which require significant judgment. These studies incorporate numerous assumptions related to the
remaining service lives and the U.S. studies involve a third party expert. The depreciation studies consider, among other factors, the analysis of
historical retirement data using recognized life analysis techniques, and the forecasting of asset life characteristics.
We identified the evaluation of capitalization of costs relating to track and railway infrastructure and depreciation expense related to
properties as a critical audit matter. The magnitude and complexities in self-constructed properties, as well as the judgments involved in the
determination of the expenditure meeting the Company’s pre-determined capitalization criteria requires subjective auditor judgment. Further,
there is a higher degree of auditor judgment required in evaluating the estimated service lives of the respective asset classes. Changes in
estimated service lives can significantly impact the amount of depreciation expense.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over
the Company’s capital additions process, including controls related to the monitoring of budget versus actual costs on capital projects and the
Company’s analysis of projects assessing that the expenditures charged to projects meet the Company’s pre-determined capitalization criteria.
We also tested certain internal controls over the Company’s depreciation expense process, including controls related to the Company’s
assessment of the Canadian and U.S. depreciation studies. We traced a sample of capital expenditure additions to underlying documentation
and assessed whether the expenditure met the Company’s pre-determined capitalization criteria. The testing was performed at a disaggregated
level by type of cost (including direct material, labor, and contracted services), and included comparisons to prior period per unit measures by
region. We evaluated the key assumptions in determining the estimated service lives in the Company’s Canadian and U.S. depreciation studies
by testing the historical data used in the depreciation studies through comparison to underlying documentation. In addition, we compared the
Company’s historical retirement patterns to the service lives used in the depreciation studies, and interviewed the Company’s personnel with
specialized knowledge of the subject matter and a third party expert.
(s) KPMG LLP*
We have served as the Company's auditor since 1992.
Montréal, Canada
January 31, 2020
* CPA auditor, CA, public accountancy permit No. A123145
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss
entity.
KPMG Canada provides services to KPMG LLP.
56 CN | 2019 Annual Report
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Canadian National Railway Company:
Opinion on internal control over financial reporting
We have audited the Canadian National Railway Company's (the "Company") internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the
consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 2019,
and the related notes (collectively, the "consolidated financial statements"), and our report dated January 31, 2020 expressed an unqualified
opinion on those consolidated financial statements.
Basis for opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
(s) KPMG LLP*
Montréal, Canada
January 31, 2020
* CPA auditor, CA, public accountancy permit No. A123145
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss
entity.
KPMG Canada provides services to KPMG LLP.
CN | 2019 Annual Report 57
Consolidated Statements of Income
In millions, except per share data
Year ended December 31,
2019
2018
2017
$
14,917
$
14,321
$
13,041
2,922
2,267
1,637
1,562
444
492
9,324
5,593
(538)
321
53
5,429
(1,213)
4,216
5.85
5.83
720.1
722.6
$
$
$
2,860
1,971
1,732
1,329
467
469
8,828
5,493
(489)
302
376
5,682
(1,354)
4,328
5.89
5.87
734.5
737.7
$
$
$
$
$
$
2,536
1,769
1,362
1,281
418
432
7,798
5,243
(481)
315
12
5,089
395
5,484
7.28
7.24
753.6
757.3
2017
5,484
(197)
(224)
(421)
(5)
(426)
Revenues (Note 4)
Operating expenses
Labor and fringe benefits
Purchased services and material
Fuel
Depreciation and amortization (Note 9)
Equipment rents
Casualty and other
Total operating expenses
Operating income
Interest expense
Other components of net periodic benefit income (Note 15)
Other income (Note 5)
Income before income taxes
Income tax recovery (expense) (Note 6)
Net income
Earnings per share (Note 7)
Basic
Diluted
Weighted-average number of shares (Note 7)
Basic
Diluted
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Other comprehensive income (loss) (Note 18)
Net gain (loss) on foreign currency translation
Net change in pension and other postretirement benefit plans (Note 15)
Other comprehensive loss before income taxes
Income tax recovery (expense)
Other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
58 CN | 2019 Annual Report
In millions
Net income
Year ended December 31,
2019
2018
$
4,216
$
4,328
$
(256)
(440)
(696)
62
(634)
403
(759)
(356)
291
(65)
$
3,582
$
4,263
$
5,058
Consolidated Balance Sheets
In millions
Assets
Current assets
Cash and cash equivalents
Restricted cash and cash equivalents (Note 13)
Accounts receivable (Note 8)
Material and supplies
Other current assets
Total current assets
Properties (Note 9)
Operating lease right-of-use assets (Note 10) (1)
Pension asset (Note 15)
Intangible assets, goodwill and other (Note 11)
Total assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable and other (Note 12)
Current portion of long-term debt (Note 13)
Total current liabilities
Deferred income taxes (Note 6)
Other liabilities and deferred credits (Note 14)
Pension and other postretirement benefits (Note 15)
Long-term debt (Note 13)
Operating lease liabilities (Note 10) (1)
Shareholders' equity
Common shares (Note 16)
Common shares in Share Trusts (Note 16)
Additional paid-in capital
Accumulated other comprehensive loss (Note 18)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
December 31,
2019
2018
$
$
$
$
64
524
1,213
611
418
2,830
39,669
520
336
429
43,784
$
$
2,357
1,930
4,287
7,844
634
733
11,866
379
3,650
(163)
403
(3,483)
17,634
18,041
266
493
1,169
557
243
2,728
37,773
—
446
267
41,214
2,316
1,184
3,500
7,480
501
707
11,385
—
3,634
(175)
408
(2,849)
16,623
17,641
$
43,784
$
41,214
(1)
The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of 2019 using a modified
retrospective approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of comparative period financial
information. The Company now includes Operating lease right-of-use assets and Operating lease liabilities on the Consolidated Balance Sheet. See Note 2 - Recent
accounting pronouncements for additional information.
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors:
(s) Robert Pace
Director
(s) Jean-Jacques Ruest
Director
CN | 2019 Annual Report 59
Consolidated Statements of Changes in Shareholders' Equity
In millions
Number of
common shares
Outstanding
Share
Trusts
Common
shares
Common
shares
in Share
Trusts
Additional
paid-in
capital
Accumulated
other
comprehensive
loss
Retained
earnings
Total
shareholders'
equity
Balance at December 31, 2016
762.0
1.8
$ 3,647
$
(137) $
450
$
(2,358) $
13,239
$
14,841
Net income
Stock options exercised
Settlement of equity settled awards
(Note 16)
Stock-based compensation expense and
other
1.2
68
0.3
(0.3)
24
(10)
(84)
78
5,484
(22)
(3)
5,484
58
(82)
75
Repurchase of common shares (Note 16)
(20.4)
(102)
(1,898)
(2,000)
Share purchases by Share Trusts
(Note 16)
Other comprehensive loss (Note 18)
Dividends ($1.65 per share)
(0.5)
0.5
(55)
(426)
(1,239)
(55)
(426)
(1,239)
Balance at December 31, 2017
742.6
2.0
3,613
(168)
434
(2,784)
15,561
16,656
Net income
Stock options exercised
Settlement of equity settled awards
(Note 16)
Stock-based compensation expense and
other
1.7
120
0.4
(0.4)
31
(17)
(68)
59
Repurchase of common shares (Note 16)
(19.0)
(99)
Share purchases by Share Trusts
(Note 16)
Other comprehensive loss (Note 18)
Dividends ($1.82 per share)
(0.4)
0.4
(38)
(65)
4,328
4,328
103
(30)
(67)
(2)
(1,901)
57
(2,000)
(38)
(65)
(1,333)
(1,333)
Balance at December 31, 2018
725.3
2.0
3,634
(175)
408
(2,849)
16,623
17,641
Net income
Stock options exercised
Settlement of equity settled awards
(Note 16)
Stock-based compensation expense and
other
1.1
89
0.5
(0.5)
45
(12)
(56)
63
Repurchase of common shares (Note 16)
(14.3)
(73)
Share purchases by Share Trusts
(Note 16)
Other comprehensive loss (Note 18)
Dividends ($2.15 per share)
Cumulative-effect adjustment from the
adoption of ASU 2016-02 (1)
(0.3)
0.3
(33)
4,216
4,216
77
(61)
(72)
(2)
(1,627)
(634)
(1,544)
61
(1,700)
(33)
(634)
(1,544)
29
29
Balance at December 31, 2019
712.3
1.8
$ 3,650
$
(163) $
403
$
(3,483) $ 17,634
$
18,041
(1)
The Company adopted Accounting Standards Update (ASU) 2016-02: Leases and related amendments (Topic 842) in the first quarter of 2019 using a modified
retrospective approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of comparative period financial
information. See Note 2 - Recent accounting pronouncements for additional information.
See accompanying notes to consolidated financial statements.
60 CN | 2019 Annual Report
Consolidated Statements of Cash Flows
In millions
Operating activities
Year ended December 31,
2019
2018
2017
Net income
$
Adjustments to reconcile net income to net cash provided by operating activities:
4,216
$
4,328
$
5,484
Depreciation and amortization
Pension income and funding (1)
Deferred income taxes (Note 6)
Gain on disposal of property (Note 5)
Changes in operating assets and liabilities:
Accounts receivable
Material and supplies
Accounts payable and other
Other current assets
Other operating activities, net (1)
Net cash provided by operating activities
Investing activities
Property additions
Acquisitions, net of cash acquired (Note 3)
Disposal of property (Note 5)
Other investing activities, net
Net cash used in investing activities
Financing activities
Issuance of debt (Note 13)
Repayment of debt (Note 13)
Change in commercial paper, net (Note 13)
Settlement of foreign exchange forward contracts on debt
Issuance of common shares for stock options exercised (Note 17)
Withholding taxes remitted on the net settlement of equity settled awards
(Note 17)
Repurchase of common shares (Note 16)
Purchase of common shares for settlement of equity settled awards
Purchase of common shares by Share Trusts (Note 16)
Dividends paid
Acquisition, additional cash consideration (Note 3)
Net cash used in financing activities
Effect of foreign exchange fluctuations on cash, cash equivalents, restricted
cash, and restricted cash equivalents
Net increase (decrease) in cash, cash equivalents, restricted cash, and
restricted cash equivalents
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
beginning of year
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
end of year
Cash and cash equivalents, end of year
Restricted cash and cash equivalents, end of year
Cash, cash equivalents, restricted cash, and restricted cash equivalents,
end of year
Supplemental cash flow information
Interest paid
Income taxes paid (Note 6)
$
$
$
$
$
1,562
(288)
569
—
(7)
(60)
(498)
5
424
5,923
(3,865)
(259)
—
(66)
(4,190)
1,653
(402)
141
2
77
(61)
(1,700)
(11)
(33)
(1,544)
(25)
(1,903)
(1)
(171)
759
588
64
524
588
(521)
(822)
$
$
$
$
$
1,329
(209)
527
(338)
(91)
(120)
379
14
99
5,918
(3,531)
—
194
(67)
(3,404)
3,268
(2,393)
99
53
103
(51)
(2,000)
(16)
(38)
(1,333)
—
(2,308)
—
206
553
759
266
493
759
(488)
(776)
$
$
$
$
$
1,281
(286)
(1,195)
—
(125)
(70)
418
(80)
89
5,516
(2,673)
—
—
(65)
(2,738)
916
(841)
379
(15)
58
(57)
(2,016)
(25)
(55)
(1,239)
—
(2,895)
(2)
(119)
672
553
70
483
553
(477)
(712)
(1)
In the first quarter of 2019, the Company began presenting Pension income and funding as a separate line on the Consolidated Statements of Cash Flows. Previously
pension income and funding was included in Other operating activities, net. Comparative figures have been adjusted to conform to the current presentation.
See accompanying notes to consolidated financial statements.
CN | 2019 Annual Report 61
63
68
70
71
72
73
75
76
76
77
79
79
80
83
84
91
93
98
99
102
103
104
Notes to the Consolidated Financial Statements
Contents
1 Summary of significant accounting policies
2 Recent accounting pronouncements
3 Business combinations
4 Revenues
5 Other income
6 Income taxes
7 Earnings per share
8 Accounts receivable
9 Properties
10 Leases
11 Intangible assets, goodwill and other
12 Accounts payable and other
13 Debt
14 Other liabilities and deferred credits
15 Pensions and other postretirement benefits
16 Share capital
17 Stock-based compensation
18 Accumulated other comprehensive loss
19 Major commitments and contingencies
20 Financial instruments
21 Segmented information
22 Subsequent events
62 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Canadian National Railway Company, together with its wholly-owned subsidiaries, collectively "CN" or the "Company," is engaged in the rail and
related transportation business. CN spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the
cities and ports of Vancouver, Prince Rupert (British Columbia), Montreal, Halifax, New Orleans and Mobile (Alabama), and the metropolitan
areas of Toronto, Edmonton, Winnipeg, Calgary, Chicago, Memphis, Detroit, Duluth (Minnesota)/Superior (Wisconsin) and Jackson (Mississippi),
with connections to all points in North America. CN's freight revenues are derived from the movement of a diversified and balanced portfolio of
goods, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.
1 – Summary of significant accounting policies
Basis of presentation
These consolidated financial statements are expressed in Canadian dollars, except where otherwise indicated, and have been prepared in
accordance with United States generally accepted accounting principles (GAAP) as codified in the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC).
Principles of consolidation
These consolidated financial statements include the accounts of all subsidiaries and variable interest entities for which the Company is the
primary beneficiary. The Company is the primary beneficiary of the Employee Benefit Plan Trusts ("Share Trusts") as the Company funds the
Share Trusts. The Company's investments in which it has significant influence are accounted for using the equity method and all other
investments for which fair value is not readily determinable are accounted for at cost minus impairment, plus or minus observable price
changes.
Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial
statements. On an ongoing basis, management reviews its estimates, including those related to goodwill, intangible assets, identified assets
and liabilities acquired in business combinations, income taxes, depreciation, pensions and other postretirement benefits, personal injury and
other claims, and environmental matters, based upon available information. Actual results could differ from these estimates.
Revenues
Nature of services
The Company's revenues consist of freight revenues and other revenues. Freight revenues include revenue from the movement of freight over
rail and are derived from the following seven commodity groups:
•
•
•
•
•
•
•
Petroleum and chemicals, which includes chemicals and plastics, refined petroleum products, crude and condensate, and sulfur;
Metals and minerals, which includes energy materials, metals, minerals, and iron ore;
Forest products, which includes lumber, pulp, paper, and panels;
Coal, which includes coal and petroleum coke;
Grain and fertilizers, which includes Canadian regulated grain, Canadian commercial grain, U.S. grain, potash and other fertilizers;
Intermodal, which includes rail and trucking services for domestic and international traffic; and
Automotive, which includes finished vehicles and auto parts.
Freight revenues also comprise revenues for optional services beyond the basic movement of freight including asset use, switching, storage,
and other services.
Other revenues are derived from non-rail logistics services that support the Company's rail business including vessels and docks,
transloading and distribution, automotive logistics, and freight forwarding and transportation management.
Revenue recognition
Revenues are recognized when control of promised services is transferred to customers in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those services.
The Company accounts for contracts with customers when it has approval and commitment from both parties, each party's rights have
been identified, payment terms are defined, the contract has commercial substance and collection is probable. For contracts that involve
multiple performance obligations, the Company allocates the transaction price to each performance obligation in the contract based on relative
standalone selling prices and recognizes revenue when, or as, performance obligations in the contract are satisfied.
Revenues are presented net of taxes collected from customers and remitted to governmental authorities.
CN | 2019 Annual Report 63
Notes to the Consolidated Financial Statements
Freight revenues
Freight services are arranged through publicly-available tariffs or customer-specific agreements that establish the pricing, terms and conditions
for freight services offered by the Company. For revenue recognition purposes, a contract for the movement of freight over rail exists when
shipping instructions are sent by a customer and have been accepted by the Company in connection with the relevant tariff or customer-
specific agreement.
Revenues for the movement of freight over rail are recognized over time due to the continuous transfer of control to the customer as
freight moves from origin to destination. Progress towards completion of the performance obligation is measured based on the transit time of
freight from origin to destination. The allocation of revenues between periods is based on the relative transit time in each period with expenses
recorded as incurred. Revenues related to freight contracts that require the involvement of another rail carrier to move freight from origin to
destination are reported on a net basis. Freight movements are completed over a short period of time and are generally completed before
payment is due. Freight receivables are included in Accounts receivable on the Consolidated Balance Sheets.
The Company has no material contract assets associated with freight revenues.
Contract liabilities represent consideration received from customers for which the related performance obligation has not been satisfied.
Contract liabilities are recognized into revenues when or as the related performance obligation is satisfied. The Company includes contract
liabilities within Accounts payable and other and Other liabilities and deferred credits on the Consolidated Balance Sheets.
Revenues for optional services are recognized at a point in time or over time as performance obligations are satisfied, depending on the
nature of the service.
Freight contracts may be subject to variable consideration in the form of volume-based incentives, rebates, or other items, which affect the
transaction price. Variable consideration is recognized as revenue to the extent that it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur. Variable consideration is accrued on the basis of management's best estimate of the expected
amount, which is based on available historical, current and forecasted information.
Other revenues
Other revenues are recognized at a point in time or over time as performance obligations are satisfied, depending on the nature of the service.
Income taxes
The Company follows the asset and liability method of accounting for income taxes. Under the asset and liability method, the change in the net
deferred income tax asset or liability is included in the computation of Net income or Other comprehensive income (loss). Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are
expected to be recovered or settled.
Earnings per share
Basic earnings per share is calculated using the weighted-average number of basic shares outstanding during the period. The weighted-average
number of basic shares outstanding excludes shares held in the Share Trusts and includes vested equity settled stock-based compensation
awards other than stock options. Diluted earnings per share is calculated using the weighted-average number of diluted shares outstanding
during the period, applying the treasury stock method. The weighted-average number of diluted shares outstanding includes the dilutive effects
of common shares issuable upon exercise of outstanding stock options and nonvested equity settled awards.
Foreign currency
All of the Company's foreign subsidiaries use the US dollar as their functional currency. Accordingly, the foreign subsidiaries' assets and
liabilities are translated into Canadian dollars at the exchange rate in effect at the balance sheet date and the revenues and expenses are
translated at the average exchange rates during the year. All adjustments resulting from the translation of the foreign operations are recorded in
Other comprehensive income (loss).
The Company designates the US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in
foreign operations. Accordingly, foreign exchange gains and losses, from the dates of designation, on the translation of the US dollar-
denominated debt are included in Other comprehensive income (loss).
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost plus accrued
interest, which approximates fair value.
64 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Restricted cash and cash equivalents
The Company has the option, under its bilateral letter of credit facility agreements with various banks, to pledge collateral in the form of cash
and cash equivalents for a minimum term of one month, equal to at least the face value of the letters of credit issued. Restricted cash and cash
equivalents include highly liquid investments purchased three months or less from maturity and are stated at cost plus accrued interest, which
approximates fair value.
Accounts receivable
Accounts receivable are recorded at cost net of billing adjustments and an allowance for doubtful accounts. The allowance for doubtful
accounts is based on expected collectability and considers historical experience as well as known trends or uncertainties related to account
collectability. When a receivable is deemed uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of
amounts previously written off are credited to bad debt expense in Casualty and other in the Consolidated Statements of Income.
Material and supplies
Material and supplies, which consist mainly of rail, ties, and other items for construction and maintenance of property and equipment, as well
as diesel fuel, are measured at weighted-average cost.
Properties
Capitalization of costs
The Company's railroad operations are highly capital intensive. The Company's properties mainly consist of homogeneous or network-type
assets such as rail, ties, ballast and other structures, which form the Company's Track and roadway properties, and Rolling stock. The
Company's capital expenditures are for the replacement of existing assets and for the purchase or construction of new assets to enhance
operations or provide new service offerings to customers. A large portion of the Company's capital expenditures are for self-constructed
properties, including the replacement of existing track and roadway assets and track line expansion, as well as major overhauls and large
refurbishments of rolling stock.
Expenditures are capitalized if they extend the life of the asset or provide future benefits such as increased revenue-generating capacity,
functionality or service capacity. The Company has a process in place to determine whether or not costs qualify for capitalization, which
requires judgment. For Track and roadway properties, the Company establishes basic capital programs to replace or upgrade the track
infrastructure assets which are capitalized if they meet the capitalization criteria.
In addition, for Track and roadway properties, expenditures that meet the minimum level of activity as defined by the Company are also
capitalized as follows:
•
•
•
•
grading: installation of road bed, retaining walls, and drainage structures;
rail and related track material: installation of 39 or more continuous feet of rail;
ties: installation of 5 or more ties per 39 feet; and
ballast: installation of 171 cubic yards of ballast per mile.
For purchased assets, the Company capitalizes all costs necessary to make the assets ready for their intended use. For self-constructed
properties, expenditures include direct material, labor, and contracted services, as well as other allocated costs. These allocated costs include,
but are not limited to, project supervision, fringe benefits, maintenance on equipment used on projects as well as the cost of small tools and
supplies. The Company reviews and adjusts its allocations, as required, to reflect the actual costs incurred each year.
For the rail asset, the Company capitalizes the costs of rail grinding which consists of restoring and improving the rail profile and removing
irregularities from worn rail to extend the service life. The service life of the rail asset is increased incrementally as rail grinding is performed
thereon, and as such, the costs incurred are capitalized given that the activity extends the service life of the rail asset beyond its original or
current condition as additional gross tons can be carried over the rail for its remaining service life.
For the ballast asset, the Company engages in shoulder ballast undercutting that consists of removing some or all of the ballast, which has
deteriorated over its service life, and replacing it with new ballast. When ballast is installed as part of a shoulder ballast undercutting project, it
represents the addition of a new asset and not the repair or maintenance of an existing asset. As such, the Company capitalizes expenditures
related to shoulder ballast undercutting given that an existing asset is retired and replaced with a new asset. Under the group method of
accounting for properties, the deteriorated ballast is retired at its historical cost.
Costs of deconstruction and removal of replaced assets, referred to herein as dismantling costs, are distinguished from installation costs
for self-constructed properties based on the nature of the related activity. For Track and roadway properties, employees concurrently perform
dismantling and installation of new track and roadway assets and, as such, the Company estimates the amount of labor and other costs that
are related to dismantling. The Company determines dismantling costs based on an analysis of the track and roadway installation process.
CN | 2019 Annual Report 65
Notes to the Consolidated Financial Statements
Expenditures relating to the Company's properties that do not meet the Company's capitalization criteria are expensed as incurred. For
Track and roadway properties, such expenditures include but are not limited to spot tie replacement, spot or broken rail replacement, physical
track inspection for detection of rail defects and minor track corrections, and other general maintenance of track infrastructure.
Depreciation
Properties are carried at cost less accumulated depreciation including asset impairment write-downs. The cost of properties, including those
under finance leases, net of asset impairment write-downs, is depreciated on a straight-line basis over their estimated service lives, measured
in years, except for rail and ballast whose service lives are measured in millions of gross tons. The Company follows the group method of
depreciation whereby a single composite depreciation rate is applied to the gross investment in a class of similar assets, despite small
differences in the service life or salvage value of individual property units within the same asset class. The Company uses approximately 40
different depreciable asset classes.
For all depreciable asset classes, the depreciation rate is based on the estimated service lives of the assets. Assessing the
reasonableness of the estimated service lives of properties requires judgment and is based on currently available information, including
periodic depreciation studies conducted by the Company. The Company's United States (U.S.) properties are subject to comprehensive
depreciation studies as required by the Surface Transportation Board (STB) and are conducted by external experts. Depreciation studies for
Canadian properties are not required by regulation and are conducted internally. Studies are performed on specific asset groups on a periodic
basis. Changes in the estimated service lives of the assets and their related composite depreciation rates are implemented prospectively.
The service life of the rail asset is based on expected future usage of the rail in its existing condition, determined using railroad industry
research and testing (based on rail characteristics such as weight, curvature and metallurgy), factoring in the rail asset's usage to date. The
annual composite depreciation rate for the rail asset is determined by dividing the estimated annual number of gross tons carried over the rail
by the estimated service life of the rail measured in millions of gross tons. The Company amortizes the cost of rail grinding over the remaining
life of the rail asset, which includes the incremental life extension generated by rail grinding.
Given the nature of the railroad and the composition of its network which is made up of homogeneous long-lived assets, it is impractical to
maintain records of specific properties at their lowest unit of property.
Retirements of assets occur through the replacement of an asset in the normal course of business, the sale of an asset or the
abandonment of a section of track. For retirements in the normal course of business, generally the life of the retired asset is within a reasonable
range of the expected useful life, as determined in the depreciation studies, and, as such, no gain or loss is recognized under the group method.
The asset's cost is removed from the asset account and the difference between its estimated historical cost and estimated related
accumulated depreciation (net of salvage proceeds and dismantling costs), if any, is recorded as an adjustment to accumulated depreciation
and no gain or loss is recognized. The estimated historical cost of the retired asset is estimated by using deflation factors or indices that
closely correlate to the properties comprising the asset classes in combination with the estimated age of the retired asset using a first-in, first-
out approach, and applying it to the replacement value of the asset.
In each depreciation study, an estimate is made of any excess or deficiency in accumulated depreciation for all corresponding asset
classes to ensure that the depreciation rates remain appropriate. The excess or deficiency in accumulated depreciation is amortized over the
remaining life of the asset class.
For retirements of depreciable properties that do not occur in the normal course of business, the historical cost, net of salvage proceeds, is
recorded as a gain or loss in income. A retirement is considered not to be in the normal course of business if it meets the following criteria: (i) it
is unusual, (ii) it is significant in amount, and (iii) it varies significantly from the retirement pattern identified through depreciation studies. A
gain or loss is recognized in Other income for the sale of land or disposal of assets that are not part of railroad operations.
Leases
The Company engages in short and long-term leases for rolling stock including locomotives and freight cars, equipment, real estate and service
contracts that contain embedded leases. The Company determines whether or not a contract contains a lease at inception. Leases with a term
of twelve months or less are not recorded by the Company on the Consolidated Balance Sheets.
Finance and operating lease right-of-use assets and liabilities are recognized based on the present value of the future lease payments over
the lease term at the commencement date. Where the implicit interest rate is not determinable from the lease, the Company uses internal
incremental borrowing rates by tenor and currency to initially measure leases in excess of twelve months on the Consolidated Balance Sheets.
Operating lease expense is recognized on a straight-line basis over the lease term.
The Company's lease contracts may contain termination, renewal, and/or purchase options, residual value guarantees, or a combination
thereof, all of which are evaluated by the Company on a quarterly basis. The majority of renewal options available extend the lease term from
one to five years. The Company accounts for such contract options when the Company is reasonably certain that it will exercise one of these
options.
66 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Lease contracts may contain lease and non-lease components that the Company generally accounts for separately, with the exception of
the freight car asset category for which the Company has elected to not separate the lease and non-lease components.
Intangible assets
Intangible assets consist mainly of customer contracts and relationships acquired through business acquisitions. Intangible assets are
generally amortized on a straight-line basis over their expected useful lives, ranging from 20 to 50 years. If a change in the estimated useful life
of an intangible asset is determined, amortization is adjusted prospectively.
For the purpose of impairment testing, the Company tests the recoverability of its intangible assets held and used whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable, based on future undiscounted cash flows. If the carrying
amount of an intangible asset is not recoverable and exceeds the fair value, an impairment loss is recognized for the amount by which the
carrying amount of the asset exceeds the fair value.
Goodwill
The Company recognizes goodwill as the excess of the purchase price over the fair value of identifiable net assets acquired in business
combinations. Goodwill is assigned to the reporting units that are expected to benefit from the business acquisition. The carrying amount of
goodwill is not amortized; instead, it is tested for impairment annually as of the first day of the fiscal fourth quarter or more frequently if events
or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount.
For the purpose of impairment testing, the Company may first assess certain qualitative factors to determine if it is more likely than not
that the fair value of a reporting unit is less than its carrying amount, including goodwill, or proceed directly to a quantitative goodwill
impairment test. Qualitative factors include but are not limited to, economic, market and industry conditions, cost factors and overall financial
performance of the reporting unit, and events such as changes in management or customers. If the qualitative assessment indicates that it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test must be performed.
The quantitative impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, including goodwill, and
an impairment loss is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the value of
goodwill. The Company defines the fair value of a reporting unit as the price that would be received to sell the reporting unit as a whole in an
orderly transaction between market participants as of the impairment date. To determine the fair value of a reporting unit, the Company uses
the discounted cash flow method using the pre-tax discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset or group of assets.
Accounts receivable securitization
Based on the structure of its accounts receivable securitization program, the Company accounts for the proceeds received as secured
borrowings.
Pensions
Pension costs are determined using actuarial methods. Net periodic benefit cost (income) includes the current service cost of pension benefits
provided in exchange for employee service rendered during the year, which is recorded in Labor and fringe benefits expense. Net periodic
benefit cost (income) also includes the following, which are recorded in Other components of net periodic benefit income (cost):
•
•
•
•
the interest cost of pension obligations;
the expected long-term return on pension fund assets;
the amortization of prior service costs and amendments over the expected average remaining service life of the employee group covered
by the plans; and
the amortization of cumulative net actuarial gains and losses in excess of 10% of the greater of the beginning of year balances of the
projected benefit obligation or market-related value of plan assets, over the expected average remaining service life of the employee group
covered by the plans.
The pension plans are funded through contributions determined in accordance with the projected unit credit actuarial cost method.
Postretirement benefits other than pensions
The Company accrues the cost of postretirement benefits other than pensions using actuarial methods. These benefits, which are funded as
they become due, include life insurance programs, medical benefits and, for a closed group of employees, free rail travel benefits.
The Company amortizes the cumulative net actuarial gains and losses in excess of 10% of the projected benefit obligation at the beginning
of the year, over the expected average remaining service life of the employee group covered by the plan.
CN | 2019 Annual Report 67
Notes to the Consolidated Financial Statements
Additional paid-in capital
Additional paid-in capital includes the stock-based compensation expense on equity settled awards and other items relating to equity settled
awards. Upon the exercise of stock options, the stock-based compensation expense related to those awards is reclassified from Additional
paid-in capital to Common shares. Upon settlement of all other equity settled awards, the Company reclassifies from Additional paid-in capital
to Retained Earnings the excess, if any, of the settlement cost of the awards over the related stock-based compensation expense, with no
adjustment to common shares.
Stock-based compensation
For equity settled awards, stock-based compensation costs are accrued over the requisite service period based on the fair value of the awards
at the grant date. The grant date fair value of performance share unit (PSU) awards is dependent on the type of PSU award. The grant date fair
value of PSU-ROIC awards is determined using a lattice-based model incorporating a minimum share price condition and the grant date fair
value of PSU-TSR awards is determined using a Monte Carlo simulation model. The grant date fair value of equity settled deferred share unit
(DSU) awards is determined using the stock price at the grant date. The grant date fair value of stock option awards is determined using the
Black-Scholes option-pricing model. For cash settled awards, stock-based compensation costs are accrued over the requisite service period
based on the fair value determined at each period-end. The fair value of cash settled DSU awards is determined using their intrinsic value.
Personal injury and other claims
In Canada, the Company accounts for costs related to employee work-related injuries based on actuarially developed estimates on a discounted
basis of the ultimate cost associated with such injuries, including compensation, health care and third-party administration costs. In the U.S.,
the Company accrues the expected cost for personal injury, property damage and occupational disease claims, based on actuarial estimates of
their ultimate cost on an undiscounted basis. For all other legal actions in Canada and the U.S., the Company maintains, and regularly updates
on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably estimated based on
currently available information.
Environmental expenditures
Environmental expenditures that relate to current operations, or to an existing condition caused by past operations, are expensed as incurred.
Environmental expenditures that provide a future benefit are capitalized. Environmental liabilities are recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company accrues its allocable share of liability taking into
account the Company's alleged responsibility, the number of potentially responsible parties and their ability to pay their respective shares of the
liability. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.
Derivative financial instruments
The Company uses derivative financial instruments from time to time in the management of its interest rate and foreign currency exposures.
Derivative instruments are recorded on the balance sheet at fair value. The changes in fair value of derivative instruments not designated or not
qualified as a hedge are recorded in Net income in the current period.
2 – Recent accounting pronouncements
The following recent Accounting Standards Updates (ASUs) issued by FASB were adopted by the Company during the current year:
ASU 2016-02 Leases and related amendments (Topic 842)
The ASU requires a lessee to recognize a right-of-use asset and a lease liability on the balance sheet for all leases greater than twelve months
and requires additional qualitative and quantitative disclosures. The lessor accounting model under the new standard is substantially
unchanged. The guidance must be applied using a modified retrospective approach. Entities may elect to apply the guidance to each prior
period presented with a cumulative-effect adjustment to retained earnings recognized at the beginning of the earliest period presented or to
apply the guidance with a cumulative-effect adjustment to retained earnings recognized at the beginning of the period of adoption.
The new standard provides a number of practical expedients and accounting policy elections upon transition. On January 1, 2019, the
Company did not elect the package of three practical expedients that permits the Company not to reassess prior conclusions about lease
qualification, classification and initial direct costs. Upon adoption, the Company elected the following practical expedients:
•
•
the use-of-hindsight practical expedient to reassess the lease term and the likelihood that a purchase option will be exercised;
the land easement practical expedient to not evaluate land easements that were not previously accounted for as leases under Topic 840;
68 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
•
•
the short-term lease exemption for all asset classes that permits entities not to recognize right-of-use assets and lease liabilities onto the
balance sheet for leases with terms of twelve months or less; and
the practical expedient to not separate lease and non-lease components for the freight car asset category.
The Company adopted this standard in the first quarter of 2019 with an effective date of January 1, 2019 using a modified retrospective
approach with a cumulative-effect adjustment to Retained earnings recognized on January 1, 2019, with no restatement of comparative period
financial information. As at January 1, 2019, the cumulative-effect adjustment to adopt the new standard increased the balance of Retained
earnings by $29 million, relating to a deferred gain on a sale-leaseback transaction of a real estate property. The initial adoption transition
adjustment to record right-of-use assets and lease liabilities for leases over twelve months on the Company's Consolidated Balance Sheet was
$756 million to each balance. The initial adoption transition adjustment is comprised of finance and operating leases of $215 million and $541
million, respectively. New finance lease right-of-use assets and finance lease liabilities are a result of the reassessment of leases with purchase
options that are reasonably certain to be exercised by the Company under the transition to Topic 842, previously accounted for as operating
leases.
ASU 2017-04 Intangibles - Goodwill and other (Topic 350): Simplifying the test for goodwill impairment
The ASU simplifies the goodwill impairment test by removing the requirement to compare the implied fair value of goodwill with its carrying
amount. Under the new standard, goodwill impairment tests are performed by comparing the fair value of a reporting unit with its carrying
amount, recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the value
of goodwill.
The guidance must be applied prospectively. The ASU is effective for annual and any interim impairment tests for periods beginning after
December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017.
The Company adopted this standard in the first quarter of 2019 with an effective date of January 1, 2019. The adoption of this standard did
not have an impact on the Company’s Consolidated Financial Statements.
The following recent ASUs issued by FASB have an effective date after December 31, 2019 and have not been adopted by the Company:
ASU 2019-12 Income taxes (Topic 740): Simplifying the accounting for income taxes
The ASU adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes
minor improvements to the codification. The ASU introduces new guidance that provides a policy election to not allocate consolidated income
taxes when a member of a consolidated tax return is not subject to income tax, and provides guidance to evaluate whether a step-up in tax
basis of goodwill relates to a business combination in which book goodwill was recognized or a separate transaction. In addition, the ASU
changes the current guidance by making an intraperiod allocation if there is a loss in continuing operations and gains outside of continuing
operations; by determining when a deferred tax liability is recognized after an investor in a foreign entity transitions to or from the equity
method of accounting; by accounting for tax law changes and year-to-date losses in interim periods; and by determining how to apply the
income tax guidance to franchise taxes and other taxes that are partially based on income.
The ASU is effective for annual and any interim period beginning after December 15, 2020. Early adoption is permitted.
The Company is evaluating the effects that the adoption of the ASU will have on its Consolidated Financial Statements; no significant
impact is expected.
ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments
The ASU requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new standard
replaces the current incurred loss impairment methodology with one that reflects expected credit losses. The adoption of the ASU is not
expected to have a significant impact on the Company’s Consolidated Financial Statements. CN will adopt the requirements of the ASU
effective January 1, 2020.
Other recently issued ASUs required to be applied for periods beginning on or after January 1, 2020 have been evaluated by the Company and
will not have a significant impact on the Company's Consolidated Financial Statements.
CN | 2019 Annual Report 69
Notes to the Consolidated Financial Statements
3 – Business combinations
2019
Acquisition of intermodal division of H&R Transport Limited
On December 2, 2019, the Company acquired the intermodal temperature-controlled transportation division of the Alberta-based H&R Transport
Limited ("H&R"). The acquisition positions CN to expand its presence in moving customer goods by offering more end to end rail supply chain
solutions to a wider range of customers.
The Company's Consolidated Balance Sheet includes the assets and liabilities of H&R as of December 2, 2019, the acquisition date. Since
the acquisition date, H&R’s results of operations have been included in the Company's results of operations. The Company has not provided pro
forma information relating to the pre-acquisition period as it was not material.
Of the total purchase price of $105 million, $95 million was paid on the closing date and $10 million, mostly related to funds withheld for
the indemnification of claims, will be paid within twenty months of the acquisition date.
The following table summarizes the consideration transferred to acquire H&R, as well as the preliminary fair value of the assets acquired
and liabilities assumed, and goodwill that were recognized at the acquisition date:
In millions
Consideration transferred
Cash paid at closing
Consideration payable
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed (1)
Current assets
Non-current assets (2)
Non-current liabilities
Total identifiable net assets (3)
Goodwill (4)
December 2
2019
$
$
$
$
$
95
10
105
10
84
(1)
93
12
(1)
(2)
(3)
(4)
The Company's purchase price allocation is preliminary, based on information available to the Company to date, and subject to change over the measurement period, which
may be up to one year from the acquisition date.
Includes identifiable intangible assets of $52 million.
Includes operating lease right-of-use assets and liabilities.
The goodwill acquired through the business combination is mainly attributable to the premium of an established business operation. The goodwill is deductible for tax
purposes.
Acquisition of the TransX Group of Companies
On March 20, 2019, the Company acquired the Manitoba-based TransX Group of Companies ("TransX"). TransX provides various transportation
and logistics services, including intermodal, truckload, less than truckload and specialized services. The acquisition positions CN to strengthen
its intermodal business, and allows the Company to expand capacity and foster additional supply chain solutions. The acquisition was subject
to a number of conditions, including regulatory review by the Competition Bureau Canada and Canada’s Ministry of Transportation. On March
18, 2019, the Competition Bureau Canada issued a No Action Letter, satisfying the only outstanding condition and allowing the Company to
close the transaction.
The Company's Consolidated Balance Sheet includes the assets and liabilities of TransX as of March 20, 2019, the acquisition date. Since
the acquisition date, TransX's results of operations have been included in the Company's results of operations. The Company has not provided
pro forma information relating to the pre-acquisition period as it was not material.
The total purchase price of $192 million included an initial cash payment of $170 million, additional consideration of $25 million, less an
adjustment of $3 million in the fourth quarter of 2019 to reflect the settlement of working capital. The acquisition date fair value of the
additional consideration, recorded as a contingent liability, was estimated based on the expected outcome of operational and financial targets,
and remained unchanged since the acquisition date. The fair value measure was based on Level 3 inputs not observable in the market. On
August 27, 2019, the additional consideration was paid.
70 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
The following table summarizes the consideration transferred to acquire TransX, as well as the preliminary fair value of the assets acquired
and liabilities assumed, and goodwill that were recognized at the acquisition date:
In millions
Consideration transferred
Cash paid at closing
Additional cash consideration and other (1)
Fair value of total consideration transferred
Recognized amounts of identifiable assets acquired and liabilities assumed (2)
Current assets
Non-current assets (3)
Current liabilities
Non-current liabilities
Total identifiable net assets (4)
Goodwill (5)
March 20
2019
170
22
192
85
260
(134)
(84)
127
65
$
$
$
$
$
(1)
(2)
(3)
(4)
(5)
Includes additional cash consideration paid of $25 million less an adjustment of $3 million to reflect the settlement of working capital.
The Company's purchase price allocation is preliminary, based on information available to the Company to date, and subject to change over the measurement period, which
may be up to one year from the acquisition date. In the fourth quarter of 2019, the fair value of net assets acquired was adjusted to reflect the settlement of working capital
and other adjustments.
Includes identifiable intangible assets of $34 million.
Includes finance and operating lease right-of-use assets and liabilities.
The goodwill acquired through the business combination is mainly attributable to the premium of an established business operation. The goodwill is not deductible for tax
purposes.
4 – Revenues
The following table provides disaggregated information for revenues:
In millions
Freight revenues
Petroleum and chemicals
Metals and minerals
Forest products
Coal
Grain and fertilizers
Intermodal
Automotive
Total freight revenues
Other revenues
Total revenues (1) (2)
Year ended December 31,
$
$
2019
3,052
1,643
1,808
658
2,392
3,787
858
14,198
719
$
2018
2,660
1,689
1,886
661
2,357
3,465
830
13,548
773
$
14,917
$
14,321
$
2017
2,208
1,523
1,788
535
2,214
3,200
825
12,293
748
13,041
(1)
As at December 31, 2019, the Company had remaining performance obligations related to freight in-transit, for which revenues of $91 million are expected to be recognized
in the next period.
(2)
See Note 21 - Segmented information for the disaggregation of revenues by geographic area.
CN | 2019 Annual Report 71
Notes to the Consolidated Financial Statements
Contract liabilities
The following table provides a reconciliation of the beginning and ending balances of contract liabilities for the years ended December 31, 2019,
and 2018:
In millions
Beginning of year
Revenue recognized included in the beginning balance
Increase due to consideration received, net of revenue recognized
End of year
Current portion - End of year
5 – Other income
In millions
Gain on disposal of property
Gain on disposal of land
Other (1)
Total other income
Year ended December 31,
2019
$
$
—
50
3
53
2019
3
(3)
211
211
50
2018
338
27
11
376
$
$
$
$
$
2018
3
(3)
3
3
3
2017
—
22
(10)
12
$
$
$
$
$
(1)
Includes foreign exchange gains and losses related to foreign exchange forward contracts and the re-measurement of foreign currency denominated monetary assets and
liabilities. See Note 20 – Financial instruments for additional information.
Disposal of property
2018
Guelph
On November 15, 2018, the Company recorded a gain of $79 million ($70 million after-tax) in Other income upon transfer of control of a
segment of the Guelph subdivision located between Georgetown and Kitchener, Ontario, together with the rail fixtures and certain passenger
agreements (the “Guelph”). The gain recognized in 2018 was previously deferred from a 2014 transaction at which time the Company did not
transfer control.
Doney and St-Francois Spurs
On September 5, 2018, the Company completed the sale of property located in Montreal, Quebec (the “Doney and St-Francois Spurs”) for cash
proceeds of $40 million. The transaction resulted in a gain of $36 million ($32 million after-tax) that was recorded in Other income on that date.
Central Station Railway Lease
On April 9, 2018, the Company completed the transfer of its finance lease in the passenger rail facilities in Montreal, Quebec, together with its
interests in related railway operating agreements (the “Central Station Railway Lease”), for cash proceeds of $115 million. The transaction
resulted in a gain of $184 million ($156 million after-tax) that was recorded in Other income on that date. The gain includes the difference
between the net book value of the asset and the cash proceeds, the extinguishment of the finance lease obligation, and the recognition of a
gain previously deferred from a sale-leaseback transaction.
Calgary Industrial Lead
On April 6, 2018, the Company completed the sale of land located in Calgary, Alberta, excluding the rail fixtures (the “Calgary Industrial Lead”),
for cash proceeds of $39 million. The transaction resulted in a gain of $39 million ($34 million after-tax) that was recorded in Other income on
that date.
72 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
6 – Income taxes
The Company's consolidated effective income tax rate differs from the Canadian, or domestic, statutory federal tax rate. The effective tax rate is
affected by recurring items in provincial, U.S. federal, state and other foreign jurisdictions, such as tax rates and the proportion of income
earned in those jurisdictions. The effective tax rate is also affected by discrete items such as income tax rate enactments, and lower corporate
income tax rates on capital dispositions that may occur in any given year.
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act ("U.S. Tax Reform"). The U.S. Tax
Reform reduces the U.S. federal corporate income tax rate from 35% to 21%, effective as of January 1, 2018. The U.S. Tax Reform also allows
for immediate capital expensing of new investments in certain qualified depreciable assets made after September 27, 2017, which will be
phased down starting in year 2023. As a result of the U.S. Tax Reform, the Company's net deferred income tax liability decreased by $1,764
million for the year ended December 31, 2017.
The U.S. Tax Reform introduced other important changes to U.S. corporate income tax laws including the creation of a new Base Erosion
Anti-abuse Tax (BEAT) that subjects certain payments from U.S. corporations to foreign related parties to additional taxes and limitations to the
deduction for net interest expense incurred by U.S. corporations. Since the enactment of the U.S. Tax Reform, U.S. authorities have issued
various proposed and finalized regulations and guidance interpreting its provisions. These interpretations have been taken into account in
calculating the Company's current year income tax provision and tax payments. The U.S. Tax Reform and these regulations are expected to
impact the Company's income tax provisions and tax payments in future years.
The following table provides a reconciliation of income tax expense (recovery):
In millions
Year ended December 31,
Canadian statutory federal tax rate
Income tax expense at the Canadian statutory federal tax rate
Income tax expense (recovery) resulting from:
Provincial and foreign income taxes (1)
Deferred income tax adjustments due to rate enactments (2)
Gain on disposals (3)
Other (4)
Income tax expense (recovery)
Net cash payments for income taxes
2019
15%
2018
15%
814
$
852
$
551
(112)
(6)
(34)
1,213
822
$
$
535
—
(51)
18
1,354
776
$
$
2017
15%
763
536
(1,706)
(3)
15
(395)
712
$
$
$
(1)
(2)
(3)
(4)
Includes mainly the impact of Canadian provincial taxes and U.S. federal and state taxes.
Includes the net deferred income tax recovery resulting from the enactment of provincial, U.S. federal, and state corporate income tax laws and/or rates.
Relates to the permanent differences arising from lower capital gain tax rates on the gain on disposal of the Company's properties in Canada.
Includes adjustments relating to the filing or resolution of matters pertaining to prior years' income taxes, including net recognized tax benefits, excess tax benefits, and
other items.
The following table provides tax information on a domestic and foreign basis:
In millions
Income before income taxes
Domestic
Foreign
Total income before income taxes
Current income tax expense
Domestic
Foreign
Total current income tax expense
Deferred income tax expense (recovery)
Domestic
Foreign
Total deferred income tax expense (recovery)
Year ended December 31,
2019
4,162
1,267
5,429
608
36
644
423
146
569
$
$
$
$
$
$
$
$
$
$
$
$
2018
4,400
1,282
5,682
818
9
827
419
108
527
$
$
$
$
$
$
2017
3,964
1,125
5,089
758
42
800
349
(1,544)
(1,195)
CN | 2019 Annual Report 73
Notes to the Consolidated Financial Statements
The following table provides the significant components of deferred income tax assets and liabilities:
In millions
Deferred income tax assets
Net operating losses and tax credit carryforwards (1)
Pension liability
Lease liabilities
Personal injury and other claims
Other postretirement benefits liability
Compensation reserves
Unrealized foreign exchange losses
Other
Total deferred income tax assets
Deferred income tax liabilities
Properties
Operating lease right-of-use assets
Pension asset
Unrealized foreign exchange gains
Other
Total deferred income tax liabilities
Total net deferred income tax liability
Total net deferred income tax liability
Domestic
Foreign
Total net deferred income tax liability
December 31,
2019
2018
$
$
$
$
$
$
$
234
137
127
61
59
51
—
69
738
8,222
131
88
15
126
8,582
7,844
4,184
3,660
7,844
$
$
$
$
$
$
$
20
128
—
65
70
74
50
61
468
7,672
—
120
—
156
7,948
7,480
3,808
3,672
7,480
(1)
As at December 31, 2019, the Company has $937 million net operating loss carryforwards for U.S. federal income tax purposes that arose in 2019, over an indefinite period.
The utilization of those U.S. federal net operating loss carryforwards is limited to 80% of taxable income in any given year, as prescribed under the provisions of the U.S. Tax
Reform. In addition, the Company has net operating loss carryforwards of $177 million for U.S. state tax purposes, which are available to offset future U.S. state taxable
income between the years 2020 and 2039.
On an annual basis, the Company assesses the need to establish a valuation allowance for its deferred income tax assets, and if it is
deemed more likely than not that its deferred income tax assets will not be realized, a valuation allowance is recorded. The ultimate realization
of deferred income tax assets is dependent upon the generation of future taxable income, of the necessary character, during the periods in
which those temporary differences become deductible. Management considers the scheduled reversals of deferred income tax liabilities, the
available carryback and carryforward periods, and projected future taxable income in making this assessment. As at December 31, 2019, in
order to fully realize all of the deferred income tax assets, the Company will need to generate future taxable income of approximately $3.0
billion, and, based upon the level of historical taxable income, projections of future taxable income of the necessary character over the periods
in which the deferred income tax assets are deductible, and the reversal of taxable temporary differences, management believes, following an
assessment of the current economic environment, it is more likely than not that the Company will realize the benefits of these deductible
differences. As at December 31, 2019, the Company has not recognized a deferred income tax asset of $244 million (2018 - $217 million) on
the unrealized foreign exchange loss recorded in Accumulated other comprehensive loss relating to its net investment in U.S. subsidiaries, as
the Company does not expect this temporary difference to reverse in the foreseeable future.
74 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
The following table provides a reconciliation of unrecognized tax benefits on the Company's domestic and foreign tax positions:
In millions
Year ended December 31,
2019
2018
2017
Gross unrecognized tax benefits at beginning of year
$
74
$
74
$
Increases for:
Tax positions related to the current year
Tax positions related to prior years
Decreases for:
Tax positions related to prior years
Settlements
Lapse of the applicable statute of limitations
Gross unrecognized tax benefits at end of year
Adjustments to reflect tax treaties and other arrangements
Net unrecognized tax benefits at end of year
$
5
—
(17)
—
—
62
(2)
60
$
12
2
(13)
(1)
—
74
(5)
69
$
61
13
2
—
(1)
(1)
74
(5)
69
As at December 31, 2019, the total amount of gross unrecognized tax benefits was $62 million, before considering tax treaties and other
arrangements between taxation authorities. The amount of net unrecognized tax benefits as at December 31, 2019 was $60 million. If
recognized, $7 million of the net unrecognized tax benefits as at December 31, 2019 would affect the effective tax rate. The Company believes
that it is reasonably possible that $23 million of the net unrecognized tax benefits as at December 31, 2019 related to Canadian federal and
provincial income tax matters, may be recognized over the next twelve months as a result of settlements and a lapse of the applicable statute
of limitations, and will not affect the effective tax rate as they relate to temporary differences.
The Company recognizes accrued interest and penalties related to gross unrecognized tax benefits in Income tax expense in the
Company's Consolidated Statements of Income. For the year ended December 31, 2019, the Company recognized accrued interest and
penalties of $1 million (2018 - $3 million; 2017 - $3 million). As at December 31, 2019, the Company had accrued interest and penalties of $11
million (2018 - $10 million).
In Canada, the Company's federal and provincial income tax returns filed for the years 2014 to 2018 remain subject to examination by the
taxation authorities. An examination of the Company's federal income tax returns for the years 2014 and 2015 is currently in progress and is
expected to be completed during 2020. In the U.S., the federal income tax returns filed for the years 2016 to 2018 and the state income tax
returns filed for the years 2015 to 2018 remain subject to examination by the taxation authorities. During the year, the Company settled certain
state tax audits which resulted in the recognition of tax benefits. Examination of the Company's U.S. federal income tax return for the year 2017
as well as examinations of certain state income tax returns are currently in progress. The Company does not anticipate any significant impacts
to its results of operations or financial position as a result of the final resolutions of such matters.
7 – Earnings per share
The following table provides a reconciliation between basic and diluted earnings per share:
In millions, except per share data
Net income
Weighted-average basic shares outstanding
Dilutive effect of stock-based compensation
Weighted-average diluted shares outstanding
Basic earnings per share
Diluted earnings per share
Units excluded from the calculation as their inclusion would not have a dilutive effect
Stock options
Performance share units
Year ended December 31,
2019
$
4,216
$
$
$
720.1
2.5
722.6
5.85
5.83
0.5
0.2
$
$
$
$
$
2018
4,328
734.5
3.2
737.7
5.89
5.87
0.6
0.3
2017
5,484
753.6
3.7
757.3
7.28
7.24
0.4
0.1
CN | 2019 Annual Report 75
Notes to the Consolidated Financial Statements
8 – Accounts receivable
In millions
Freight
Non-freight
Gross accounts receivable
Allowance for doubtful accounts
Net accounts receivable
9 – Properties
December 31,
2019
$
$
1,008
$
233
1,241
(28)
1,213
$
2018
974
221
1,195
(26)
1,169
In millions
Depreciation
rate
Cost
Accumulated
Depreciation
Net
Cost
December 31, 2019
December 31, 2018
Accumulated
Depreciation
2% $
39,395
$
5%
3%
9%
5%
7,538
1,956
1,972
2,720
8,502
2,941
692
688
1,089
$
30,893
$
38,352
$
4,597
1,264
1,284
1,631
6,883
1,924
1,795
2,124
8,276
2,842
668
686
833
$
53,581
$
13,912
$
39,669
$
51,078
$
13,305
$
37,773
Net
$
30,076
4,041
1,256
1,109
1,291
Properties including finance leases
Track and roadway (1)
Rolling stock
Buildings
Information technology (2)
Other
Total properties including finance leases (3) (4)
Finance leases included in properties
Track and roadway (5)
Rolling stock
Buildings
Other
Total finance leases included in properties
$
$
525
$
107
$
418
$
406
$
85
$
321
$
406
$
87
27
128
648
2
9
18
$
114
$
85
18
110
534
—
27
92
80
—
9
18
$
326
—
18
74
(1)
(2)
(3)
(4)
(5)
As at December 31, 2019, includes land of $2,401 million (2018 - $2,455 million).
In 2019, the Company capitalized costs for internally developed software and related licenses of $273 million (2018 - $283 million).
In 2019, property additions, net of finance leases, were $3,865 million (2018 - $3,531 million), of which $1,489 million (2018 - $1,547 million) related to track and railway
infrastructure maintenance.
In 2019, depreciation expense related to properties was $1,559 million (2018 - $1,327 million).
As at December 31, 2019, includes right-of-way access of $106 million (2018 - $107 million).
In the first quarter of 2019, the Company recognized an expense of $84 million related to costs previously capitalized for a Positive Train
Control (PTC) back office system following the deployment of a replacement system. The expense was recognized in Depreciation and
amortization on the Consolidated Statements of Income.
76 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
10 – Leases
The following table provides the Company’s lease costs for the year ended December 31, 2019:
In millions
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Total finance lease cost
Operating lease cost
Short-term lease cost
Variable lease cost (1)
Total lease cost (2)
Year ended December 31,
2019
$
$
11
8
19
171
47
63
300
(1) Mainly relates to leases of trucks for the Company's freight delivery service contracts.
(2)
Includes lease costs from purchased services and material and equipment rents in the Consolidated Statements of Income.
Rental expense for operating leases for the years ended December 31, 2018 and 2017 were $218 million and $191 million, respectively.
The following table provides the Company's lease right-of-use assets and lease liabilities, and their classification on the Consolidated
Balance Sheet as at December 31, 2019:
In millions
Classification
December 31,
Lease right-of-use assets
Finance leases
Operating leases
Total lease right-of-use assets
Properties
Operating lease right-of-use assets
Lease liabilities
Current
Finance leases
Operating leases
Noncurrent
Finance leases
Operating leases
Total lease liabilities
Current portion of long-term debt
Accounts payable and other
Long-term debt
Operating lease liabilities
2019
534
520
1,054
59
122
75
379
635
$
$
$
$
The following table provides the remaining lease terms and discount rates for the Company's leases as at December 31, 2019:
Weighted-average remaining lease term (years)
Finance leases
Operating leases
Weighted-average discount rate (%)
Finance leases
Operating leases
December 31,
2019
1.4
7.0
3.21
3.12
CN | 2019 Annual Report 77
Notes to the Consolidated Financial Statements
The following table provides additional information for the Company's leases for the year ended December 31, 2019:
In millions
Year ended December 31,
2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows from operating leases
Operating cash outflows from finance leases
Financing cash outflows from finance leases
Right-of-use assets obtained in exchange for lease liabilities
Operating lease
Finance lease
$
$
$
$
$
170
6
162
79
—
The following table provides the maturities of lease liabilities for the next five years and thereafter as at December 31, 2019:
In millions
2020
2021
2022
2023
2024
2025 and thereafter
Total lease payments
Less: Imputed interest
Present value of lease payments
Finance leases
Operating leases (1)
$
$
62
72
1
—
—
3
138
4
134
$
$
135
108
73
51
37
156
560
59
501
(1)
Includes $70 million related to renewal options that are reasonably certain to be exercised.
The following table provides the maturities of lease liabilities under ASC 840 "Leases" for the next five years and thereafter as at
Capital leases
Operating leases
190
136
103
64
45
125
663
$
$
10
15
5
—
—
—
30
1
29
$
$
$
December 31, 2018:
In millions
2019
2020
2021
2022
2023
2024 and thereafter
Total lease payments
Less: Imputed interest
Present value of lease payments
78 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
11 – Intangible assets, goodwill and other
In millions
Intangible assets
Investments (1)
Goodwill (Note 3)
Deferred costs
Long-term receivables
Other long-term assets
Total intangible assets, goodwill and other
December 31,
2019
2018
$
$
152
$
84
77
67
31
18
73
70
—
61
26
37
429
$
267
(1)
As at December 31, 2019, the Company had $60 million (2018 - $54 million) of investments accounted for under the equity method and $24 million (2018 - $16 million) of
investments for which fair value was not readily determinable accounted for at cost minus impairment, plus or minus observable price changes.
12 – Accounts payable and other
In millions
Trade payables
Accrued charges
Payroll-related accruals
Income and other taxes
Accrued interest
Operating lease liabilities (Note 10)
Personal injury and other claims provisions (Note 19)
Contract liabilities (Note 4)
Environmental provisions (Note 19)
Other postretirement benefits liability (Note 15)
Other
Total accounts payable and other
December 31,
2019
2018
$
$
866
318
284
202
161
122
91
50
38
15
210
$
2,357
$
982
232
436
205
142
—
97
3
39
17
163
2,316
CN | 2019 Annual Report 79
Maturity
US dollar-
denominated
amount
December 31,
2019
2018
Notes to the Consolidated Financial Statements
13 – Debt
In millions
Notes and debentures (1)
Canadian National series:
2.40% 2-year notes (2)
2.75% 7-year notes (2)
2.85% 10-year notes (2)
2.25% 10-year notes (2)
7.63% 30-year debentures
2.95% 10-year notes (2)
2.80% 10-year notes (2)
2.75% 10-year notes (2)
6.90% 30-year notes (2)
3.20% 10-year notes (2)
3.00% 10-year notes (2)
7.38% 30-year debentures (2)
6.25% 30-year notes (2)
6.20% 30-year notes (2)
6.71% Puttable Reset Securities PURSSM (2)
6.38% 30-year debentures (2)
3.50% 30-year notes (2)
4.50% 30-year notes (2)
3.95% 30-year notes (2)
3.20% 30-year notes (2)
3.60% 30-year notes (2)
3.65% 30-year notes (2)
3.60% 30-year notes (2)
4.45% 30-year notes (2)
3.60% 30-year notes (2)
3.05% 30-year notes (2)
4.00% 50-year notes (2)
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
US$
300
400
250
150
350
500
475
200
500
450
250
300
250
250
650
600
650
Feb 3, 2020
Feb 18, 2021
Dec 15, 2021
Nov 15, 2022
May 15, 2023
Nov 21, 2024
Sep 22, 2025
Mar 1, 2026
Jul 15, 2028
Jul 31, 2028
Feb 8, 2029
Oct 15, 2031
Aug 1, 2034
Jun 1, 2036
Jul 15, 2036
Nov 15, 2037
Nov 15, 2042
Nov 7, 2043
Sep 22, 2045
Aug 2, 2046
Aug 1, 2047
Feb 3, 2048
Jul 31, 2048
Jan 20, 2049
Feb 8, 2049
Feb 8, 2050
Sep 22, 2065
Illinois Central series:
7.70% 100-year debentures
Sep 15, 2096
US$
125
BC Rail series:
Non-interest bearing 90-year subordinated notes (3)
Jul 14, 2094
Total notes and debentures
Other
Commercial paper
Accounts receivable securitization
Finance lease liabilities and other (4)
Total debt, gross
Net unamortized discount and debt issuance costs (3)
Total debt (5)
Less: Current portion of long-term debt
Total long-term debt
$
$
390
250
520
325
195
455
350
649
617
350
350
260
649
585
325
390
325
325
400
844
500
779
450
844
450
450
100
162
842
409
250
546
341
205
477
350
682
648
350
—
273
682
614
341
409
341
341
400
886
500
818
450
886
—
—
100
170
842
13,131
12,311
1,277
200
138
14,746
(950)
13,796
1,930
$
11,866
$
1,175
—
29
13,515
(946)
12,569
1,184
11,385
(1)
(2)
(3)
(4)
(5)
The Company's notes and debentures are unsecured.
The fixed rate debt securities are redeemable, in whole or in part, at the option of the Company, at any time, at the greater of par and a formula price based on interest rates
prevailing at the time of redemption.
As at December 31, 2019, these notes were recorded as a discounted debt of $12 million (2018 - $12 million) using an imputed interest rate of 5.75% (2018 - 5.75%). The
discount of $830 million (2018 - $830 million) is included in Net unamortized discount and debt issuance costs.
Includes $4 million of equipment loans in 2019.
See Note 20 - Financial instruments for the fair value of debt.
80 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Notes and debentures
For the year ended December 31, 2019, the Company issued the following:
•
•
On November 1, 2019, issuance of $450 million 3.05% Notes due 2050 in the Canadian capital markets, which resulted in net proceeds of
$443 million; and
On February 8, 2019, issuance of $350 million 3.00% Notes due 2029 and $450 million 3.60% Notes due 2049 in the Canadian capital
markets, which resulted in total net proceeds of $790 million.
For the year ended December 31, 2018, the Company issued and repaid the following:
•
•
•
•
•
•
On November 7, 2018, issuance of US$650 million ($854 million) 4.45% Notes due 2049 in the U.S. capital markets, which resulted in net
proceeds of $845 million;
On August 30, 2018, early redemption of US$550 million 5.55% Notes due 2019 for US$558 million ($720 million), which resulted in a loss
of US$8 million ($10 million) that was recorded in Other income;
On July 31, 2018, issuance of $350 million 3.20% Notes due 2028 and $450 million 3.60% Notes due 2048 in the Canadian capital markets,
which resulted in total net proceeds of $787 million;
On July 15, 2018, repayment of US$200 million ($264 million) 6.80% Notes due 2018 upon maturity;
On May 15, 2018, repayment of US$325 million ($415 million) 5.55% Notes due 2018 upon maturity; and
On February 6, 2018, issuance of US$300 million ($374 million) 2.40% Notes due 2020 and US$600 million ($749 million) 3.65% Notes due
2048 in the U.S. capital markets, which resulted in total net proceeds of $1,106 million.
Revolving credit facility
The Company has an unsecured revolving credit facility with a consortium of lenders, which is available for general corporate purposes,
including backstopping the Company's commercial paper programs. On March 15, 2019, the Company's revolving credit facility agreement was
amended, which extended the term of the credit facility by one year and increased the credit facility from $1.8 billion to $2.0 billion, effective
May 5, 2019. The amended credit facility of $2.0 billion consists of a $1.0 billion tranche maturing on May 5, 2022 and a $1.0 billion tranche
maturing on May 5, 2024. Under the amended credit facility, the Company has the option to request an extension once a year to maintain the
tenors of three years and five years of the respective tranches subject to the consent of the individual lenders. The accordion feature, which
provides for an additional $500 million of credit under the facility, remains unchanged. The credit facility agreement contains customary terms
and conditions, which were substantially unchanged by the amendment. The credit facility provides for borrowings at various benchmark
interest rates, plus applicable margins, based on CN's debt credit ratings. The credit facility agreement has one financial covenant, which limits
debt as a percentage of total capitalization, and with which the Company is in compliance.
As at December 31, 2019 and 2018, the Company had no outstanding borrowings under its revolving credit facility and there were no draws
during the years ended December 31, 2019 and 2018.
Non-revolving credit facility
On July 25, 2019, the Company entered into an agreement for a non-revolving term loan credit facility in the principal amount of up to US$300
million, secured by rolling stock, which may be drawn upon during the period from July 25, 2019 to March 31, 2020. Term loans made under the
facility have a tenor of 20 years, bear interest at a variable rate, and are prepayable at any time without penalty. The credit facility is available for
financing or refinancing the purchase of equipment. As at December 31, 2019, the Company had no outstanding borrowings under its non-
revolving credit facility and there were no draws during the year ended December 31, 2019.
Commercial paper
The Company has a commercial paper program in Canada and in the U.S. Both programs are backstopped by the Company's revolving credit
facility. As of May 5, 2019, the maximum aggregate principal amount of commercial paper that could be issued increased from
$1.8 billion to $2.0 billion, or the US dollar equivalent, on a combined basis. As at December 31, 2019 and 2018, the Company had total
commercial paper borrowings of US$983 million ($1,277 million) and US$862 million ($1,175 million), respectively, at a weighted-average
interest rate of 1.77% and 2.47%, respectively, presented in Current portion of long-term debt on the Consolidated Balance Sheets.
CN | 2019 Annual Report 81
Notes to the Consolidated Financial Statements
The following table provides a summary of cash flows associated with the issuance and repayment of commercial paper:
In millions
Year ended December 31,
2019
2018
2017
Commercial paper with maturities less than 90 days
Issuance
Repayment
Change in commercial paper with maturities less than 90 days, net
Commercial paper with maturities of 90 days or greater
Issuance
Repayment
Change in commercial paper with maturities of 90 days or greater, net
Change in commercial paper, net
$
$
$
$
$
5,069
(5,141)
(72)
2,115
(1,902)
213
141
$
$
$
$
$
8,292
(8,442)
(150)
1,135
(886)
249
99
$
$
$
$
$
4,539
(4,160)
379
—
—
—
379
Accounts receivable securitization program
The Company has an agreement, expiring on February 1, 2021, to sell an undivided co-ownership interest in a revolving pool of accounts
receivable to unrelated trusts for maximum cash proceeds of $450 million.
As at December 31, 2019, the Company had accounts receivable securitization borrowings of $200 million at a weighted-average interest
rate of 1.90%, secured by and limited to $224 million of accounts receivable, presented in Current portion of long-term debt on the Consolidated
Balance Sheet. As at December 31, 2018, the Company had no proceeds received under the accounts receivable securitization program.
The following table provides a summary of cash flows associated with the proceeds received and repayment of the accounts receivable
securitization program:
In millions
Beginning of year
Proceeds received
Repayment
Foreign exchange
End of year
Year ended December 31,
$
2019
—
420
(220)
—
200
$
2018
421
530
(950)
(1)
—
$
$
2017
—
423
—
(2)
421
$
$
Bilateral letter of credit facilities
The Company has a series of committed and uncommitted bilateral letter of credit facility agreements. On March 15, 2019, the Company
extended the maturity date of the committed bilateral letter of credit facility agreements to April 28, 2022. The agreements are held with various
banks to support the Company's requirements to post letters of credit in the ordinary course of business. Under these agreements, the
Company has the option from time to time to pledge collateral in the form of cash or cash equivalents, for a minimum term of one month, equal
to at least the face value of the letters of credit issued.
As at December 31, 2019, the Company had outstanding letters of credit of $424 million (2018 - $410 million) under the committed
facilities from a total available amount of $459 million (2018 - $447 million) and $149 million (2018 - $137 million) under the uncommitted
facilities. As at December 31, 2019, included in Restricted cash and cash equivalents was $429 million (2018 - $408 million) and $90 million
(2018 - $80 million) which were pledged as collateral under the committed and uncommitted bilateral letter of credit facilities, respectively.
82 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Debt maturities
The following table provides the debt maturities, excluding finance lease liabilities, as at December 31, 2019, for the next five years and
thereafter:
In millions
2020
2021
2022
2023
2024
2025 and thereafter
Total
Finance lease liabilities (2)
Total debt
(1)
Presented net of unamortized discounts and debt issuance costs.
(2) See Note 10 - Leases for maturities of finance lease liabilities.
Amount of US dollar-denominated debt
In millions
Notes and debentures
Commercial paper
Finance lease liabilities and other
Total amount of US dollar-denominated debt in US$
Total amount of US dollar-denominated debt in C$
14 – Other liabilities and deferred credits
In millions
Personal injury and other claims provisions (Note 19) (1)
Contract liabilities (Note 4) (1)
Environmental provisions (Note 19) (1)
Stock-based compensation liability (Note 17)
Deferred credits and other
Total other liabilities and deferred credits
(1)
See Note 12 – Accounts payable and other for the related current portion.
Debt (1)
1,871
761
317
187
447
10,079
13,662
134
13,796
$
$
December 31,
US$
2019
6,650
983
74
US$
2018
6,650
862
21
US$
7,707
US$
7,533
$
10,011
$
10,273
December 31,
2019
$
$
261
161
19
16
177
634
$
$
2018
249
—
22
19
211
501
CN | 2019 Annual Report 83
Notes to the Consolidated Financial Statements
15 – Pensions and other postretirement benefits
The Company has various retirement benefit plans under which substantially all of its employees are entitled to benefits at retirement age,
generally based on compensation and length of service and/or contributions. Senior and executive management employees, subject to certain
minimum service and age requirements, are also eligible for an additional retirement benefit under their Special Retirement Stipend
Agreements, the Supplemental Executive Retirement Plan or the Defined Contribution Supplemental Executive Retirement Plan.
The Company also offers postretirement benefits to certain employees providing life insurance, medical benefits and, for a closed group of
employees, free rail travel benefits during retirement. These postretirement benefits are funded as they become due. The information in the
tables that follow pertains to all of the Company's defined benefit plans. However, the following descriptions relate solely to the Company's
main pension plan, the CN Pension Plan, unless otherwise specified.
Description of the CN Pension Plan
The CN Pension Plan is a contributory defined benefit pension plan that covers the majority of CN employees. It provides for pensions based
mainly on years of service and final average pensionable earnings and is generally applicable from the first day of employment. Indexation of
pensions is provided after retirement through a gain/loss sharing mechanism, subject to guaranteed minimum increases. An independent trust
company is the Trustee of the Company's pension trust funds (which includes the CN Pension Trust Fund). As Trustee, the trust company
performs certain duties, which include holding legal title to the assets of the CN Pension Trust Fund and ensuring that the Company, as
Administrator, complies with the provisions of the CN Pension Plan and the related legislation. The Company utilizes a measurement date of
December 31 for the CN Pension Plan.
Funding policy
Employee contributions to the CN Pension Plan are determined by the plan rules. Company contributions are in accordance with the
requirements of the Government of Canada legislation, the Pension Benefits Standards Act, 1985, including amendments and regulations
thereto, and such contributions follow minimum and maximum thresholds as determined by actuarial valuations. Actuarial valuations are
generally required on an annual basis for all Canadian defined benefit pension plans, or when deemed appropriate by the Office of the
Superintendent of Financial Institutions. These actuarial valuations are prepared in accordance with legislative requirements and with the
recommendations of the Canadian Institute of Actuaries for the valuation of pension plans. Actuarial valuations are also required annually for
the Company's U.S. qualified defined benefit pension plans.
The Company's most recently filed actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans
conducted as at December 31, 2018 indicated a funding excess on a going concern basis of approximately $3.3 billion and a funding excess on
a solvency basis of approximately $0.5 billion, calculated using the three-year average of the plans' hypothetical wind-up ratio in accordance
with the Pension Benefit Standards Regulations, 1985. The federal pension legislation requires funding deficits, if any, to be paid over a number
of years, as calculated under current pension regulations. Alternatively, a letter of credit can be subscribed to fulfill required solvency deficit
payments.
The Company's next actuarial valuations for funding purposes for its Canadian registered defined benefit pension plans required as at
December 31, 2019 will be performed in 2020. These actuarial valuations are expected to identify a funding excess on a going concern basis of
approximately $3.5 billion, while on a solvency basis a funding excess of approximately $0.5 billion is expected. Based on the anticipated
results of these valuations, the Company expects to make total cash contributions of approximately $135 million for all of the Company's
pension plans in 2020. As at January 31, 2020 the Company had contributed $59 million to its defined benefit pension plans for 2020.
84 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Plan assets
The assets of the Company's various Canadian defined benefit pension plans are primarily held in separate trust funds ("Trusts") which are
diversified by asset type, country, sector and investment strategy. Each year, the CN Board of Directors reviews and confirms or amends the
Statement of Investment Policies and Procedures ("SIPP") which includes the plans' long-term target asset allocation ("Policy") and related
benchmark indices. This Policy is based on the long-term expectations of the economy and financial market returns and considers the
dynamics of the plans' pension benefit obligations. In 2019, the Policy was amended to affect a target asset allocation change to bonds and
mortgages, emerging market debt, private debt, absolute return and investment-related liabilities.
The CN Investment Division ("Investment Manager"), a division of the Company created to invest and administer the assets of the plan, can
also implement an investment strategy ("Strategy") which can lead the Plan's actual asset allocation to deviate from the Policy due to changing
market risks and opportunities. The Pension and Investment Committee of the Board of Directors ("Committee") regularly compares the actual
plan asset allocation to the Policy and Strategy and compares the actual performance of the Company's pension plan assets to the
performance of the benchmark indices.
The Company's 2019 Policy and actual asset allocation for the Company's pension plans based on fair value are as follows:
Cash and short-term investments
Bonds and mortgages (1)
Emerging market debt (1)
Private debt (1)
Equities
Real estate
Oil and gas
Infrastructure (1)
Absolute return
Risk-factor allocation
Investment-related liabilities
Total
Actual plan asset allocation
Policy
2019
2018
3 %
35 %
1.5 %
1.5 %
40 %
4 %
7 %
4 %
10 %
— %
(6)%
3 %
36 %
3 %
3 %
37 %
2 %
5 %
3 %
10 %
1 %
(3)%
3%
35%
3%
2%
33%
2%
6%
4%
10%
2%
—%
100 %
100 %
100%
(1)
Certain assets in the 2018 comparative figures have been reclassified from bonds and mortgages and infrastructure to emerging market debt and private debt, respectively,
to conform to the current year's presentation.
The Committee's approval is required for all major investments in illiquid securities. The SIPP allows for the use of derivative financial
instruments to implement strategies, hedge and adjust existing or anticipated exposures. The SIPP prohibits investments in securities of the
Company or its subsidiaries. Investments held in the Company's pension plans consist mainly of the following:
•
•
•
•
•
•
•
•
•
Cash and short-term investments consist of highly liquid securities which ensure adequate cash flows are available to cover near-term
benefit payments. Short-term investments are mainly obligations issued by Canadian chartered banks.
Bonds include bond instruments, issued or guaranteed by governments and non-government entities. As at December 31, 2019, 80% (2018
- 80%) of bonds were issued or guaranteed by Canadian, U.S. or other governments. Mortgages consist of mortgage products which are
primarily conventional or participating loans secured by commercial properties. On an exposure basis, the Plan's policy reflects an
allocation of 45%, comprising a 35% allocation to bonds and mortgages investments and a 10% allocation to derivative financial
instruments.
Emerging market debt consists of units invested in mainly open-ended funds whose mandate is to invest in debt instruments of emerging
market countries.
Private debt includes participations in private debt funds focused on generating steady yields.
Equity investments include publicly traded securities diversified by industry sector, country and issuer and investments in mainly energy
related private equity funds. As at December 31, 2019, the most significant allocation to an individual issuer of a publicly traded security
was 1% (2018 - 2%) and the most significant allocation to an industry sector was 12% (2018 - 22%).
Real estate is a diversified portfolio of Canadian land and commercial properties and investments in real estate private equity funds.
Oil and gas investments include petroleum and natural gas properties and listed and non-listed securities of oil and gas companies.
Infrastructure investments include participations in private infrastructure funds, term loans and notes of infrastructure companies.
Absolute return investments are primarily a portfolio of units of externally managed hedge funds, which are invested in various long/short
strategies within multi-strategy, fixed income, equity and global macro funds. Managers are monitored on a continuous basis through
investment and operational due diligence.
CN | 2019 Annual Report 85
Notes to the Consolidated Financial Statements
•
•
Risk-factor allocation investments are a portfolio of units of externally managed funds and internally managed strategies in order to
capture alternative risk premia.
Investment-related liabilities include a certain level of financing associated with securities sold under repurchase agreements and other
assets.
The plans' Investment Manager monitors market events and risk exposures to foreign currencies, interest rates, market risks, credit risks
and liquidity risks daily. When investing in foreign securities, the plans are exposed to foreign currency risk that may be adjusted or hedged; the
effect of which is included in the valuation of the foreign securities. Net of the adjusted or hedged amount, the plans were 60% exposed to the
Canadian dollar, 21% to the US dollar, 9% to European currencies, 3% to the Japanese Yen and 7% to various other currencies as at December
31, 2019. Interest rate risk represents the risk that the fair value of the investments will fluctuate due to changes in market interest rates.
Sensitivity to interest rates is a function of the timing and amount of cash flows of the interest-bearing assets and liabilities of the plans.
Derivatives are used from time to time to adjust the plan asset allocation or exposures to interest rates, foreign currencies, market risks or
commodity prices of the portfolio or anticipated transactions. Derivatives are contractual agreements whose value is derived from interest
rates, foreign exchange rates, and equity or commodity prices. They may include forwards, futures, options and swaps and are included in
investment categories based on their underlying exposure. When derivatives are used for hedging purposes, the gains or losses on the
derivatives are offset by a corresponding change in the value of the hedged assets. To manage credit risk, established policies require dealing
with counterparties considered to be of high credit quality. Adequate liquidity is maintained to cover cash flows by monitoring factors such as
fair value, collateral pledged and received, repurchase agreements and securities lending agreements.
Overall return in the capital markets and the level of interest rates affect the funded status of the Company's pension plans, particularly the
Company's main Canadian pension plan. Adverse changes with respect to pension plan returns and the level of interest rates from the date of
the last actuarial valuations may have a material adverse effect on the funded status of the plans and on the Company's results of operations.
86 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
The following tables present the fair value of plan assets by asset class as at December 31, 2019 and 2018:
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt (3)
Mortgages (4)
Private debt (5)
Public equities (6)
Canadian
U.S.
International
Private equities (7)
Real estate (8)
Oil and gas (9)
Infrastructure (10)
Absolute return funds (11)
Multi-strategy
Fixed income
Global macro
Growth insurance
Risk-factor allocation (12)
Total investments (13)
Investment-related liabilities (14)
Other (15)
Total plan assets
In millions
Cash and short-term investments (1)
Bonds (2)
Canada, U.S. and supranational
Provinces of Canada and municipalities
Corporate
Emerging market debt (3)
Mortgages (4)
Private debt (5)
Public equities (6)
Canadian
U.S.
International
Private equities (7)
Real estate (8)
Oil and gas (9)
Infrastructure (10)
Absolute return funds (11)
Multi-strategy
Fixed income
Global macro
Risk-factor allocation (12)
Total investments (13)
Other (15)
Total plan assets
Fair value measurements at December 31, 2019
$
Total
502
$
Level 1
92
$
Level 2
410
$
Level 3
—
$
—
—
—
—
—
—
338
3,234
3,006
—
—
177
—
—
—
—
17
—
6,864
$
771
4,503
1,347
500
52
—
—
31
—
—
—
17
66
—
—
—
—
—
7,697
—
—
—
—
—
—
—
—
—
—
329
707
—
—
—
—
—
—
1,036
$
$
771
4,503
1,347
500
52
481
338
3,265
3,006
215
435
901
619
1,083
175
490
17
288
18,988
(565)
1
18,424
$
Fair value measurements at December 31, 2018
Total
577
$
Level 1
12
$
Level 2
565
$
Level 3
—
$
1,801
2,987
1,180
540
90
366
1,561
447
3,338
274
421
948
704
898
239
480
286
17,137
107
17,244
$
—
—
—
—
—
—
1,561
447
3,338
—
—
202
—
—
—
—
—
5,560
1,801
2,987
1,180
540
90
—
—
—
—
—
—
18
64
—
—
—
—
—
—
—
—
—
—
321
728
—
—
—
—
—
7,245
$
—
—
—
—
1,049
$
$
$
$
$
$
$
Level 1: Fair value based on quoted prices in active markets for identical assets.
Level 2: Fair value based on other significant observable inputs.
Level 3: Fair value based on significant unobservable inputs.
NAV: Investments measured at net asset value as a practical expedient.
NAV
—
—
—
—
—
—
481
—
—
—
215
106
—
553
1,083
175
490
—
288
3,391
NAV
—
—
—
—
—
—
366
—
—
—
274
100
—
640
898
239
480
286
3,283
Footnotes to the table follow on the next page.
CN | 2019 Annual Report 87
Notes to the Consolidated Financial Statements
The following table reconciles the beginning and ending balances of the fair value of investments classified as Level 3:
In millions
Balance at December 31, 2017
Actual return relating to assets still held at the reporting date
Purchases
Sales
Disbursements
Balance at December 31, 2018
Actual return relating to assets still held at the reporting date
Purchases
Sales
Disbursements
Fair value measurements based on significant unobservable
inputs (Level 3)
Oil and gas (9)
Real estate (8)
Total
$
332
$
(2)
1
(1)
(9)
321
13
3
(1)
(7)
769
(11)
—
—
(30)
728
7
—
—
(28)
707
$
1,101
(13)
1
(1)
(39)
1,049
20
3
(1)
(35)
$
1,036
Balance at December 31, 2019
$
329
$
(1)
(2)
Cash and short-term investments with related accrued interest are valued at cost, which approximates fair value, and are categorized as Level 1 and Level 2 respectively.
Bonds are valued using mid-market prices obtained from independent pricing data suppliers. When prices are not available from independent sources, the fair value is
based on the present value of future cash flows using current market yields for comparable instruments.
(3)
Emerging market debt funds are valued based on the net asset value which is readily available and published by each fund's independent administrator.
(4) Mortgages are valued based on the present value of future net cash flows using current market yields for comparable instruments.
(5)
(6)
(7)
(8)
Private debt investments are valued based on the net asset value as reported by each fund's manager, generally based on the present value of future net cash flows using
current market yields for comparable instruments.
The fair value of public equity investments is based on quoted prices in active markets for identical assets.
Private equity investments are valued based on the net asset value as reported by each fund's manager, generally using discounted cash flow analysis or earnings
multiples.
The fair value of real estate investments categorized as Level 3 includes immoveable properties. Land is valued based on the fair value of comparable assets, and income
producing properties are valued based on the present value of estimated future net cash flows or the fair value of comparable assets. Independent valuations of all
immoveable properties are performed triennially on a rotational basis. The fair value of real estate investments categorized as NAV consists mainly of investments in real
estate private equity funds and is based on the net asset value as reported by each fund's manager, generally using a discounted cash flow analysis or earnings multiples.
(9) Oil and gas investments categorized as Level 1 are valued based on quoted prices in active markets. Oil and gas participations traded on a secondary market are valued
based on the most recent transaction price and are categorized as Level 2. Investments in oil and gas categorized as Level 3 consist of operating oil and gas properties and
the fair value is based on estimated future net cash flows that are discounted using prevailing market rates for transactions in similar assets. Estimated future net cash
flows are based on forecasted oil and gas prices and projected annual production and costs.
(10) The fair value of infrastructure investments categorized as Level 2 is based on the present value of future cash flows using current market yields for comparable
instruments. The fair value of infrastructure funds categorized as NAV is based on the net asset value as reported by each fund's manager, generally using a discounted
cash flow analysis or earnings multiples.
(11) Absolute return investments are valued using the net asset value as reported by each fund's independent administrator. All absolute return investments have contractual
redemption frequencies, ranging from monthly to annually, and redemption notice periods varying from 5 to 90 days.
(12) Risk-factor allocation investments are valued using the net asset value as reported by each fund's independent administrator or fund manager. All funds have contractual
redemption frequencies ranging from daily to annually, and redemption notice periods varying from 5 to 60 days.
(13) Derivative financial instruments, which are included in gross investments, are valued using quoted market prices when available and are categorized as Level 1, or based on
valuation techniques using market data, when quoted market prices are not available and are categorized as Level 2. Derivatives are included in the investment asset
categories based on their underlying exposure.
(14)
Investment-related liabilities include securities sold under repurchase agreements. The securities sold under repurchase agreement do not meet the conditions to remove
from the assets and are therefore maintained on the books with an offsetting liability recorded to represent the financing nature of this transaction. These agreements are
recorded at cost, which together with accrued interest approximates fair value due to their short-term nature.
(15) Other consists of operating assets of $108 million (2018 - $120 million) and liabilities of $107 million (2018 - $13 million) required to administer the Trusts' investment
assets and the plans' benefit and funding activities. Such assets are valued at cost and have not been assigned to a fair value category.
88 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Obligations and funded status for defined benefit pension and other postretirement benefit plans
In millions
Change in benefit obligation
Year ended December 31,
2019
2018
2019
2018
Pensions
Other postretirement benefits
Projected benefit obligation at beginning of year
$
17,275
$
18,025
$
247
$
Amendments
Interest cost
Actuarial loss (gain) on projected benefit obligation (1)
Current service cost
Plan participants' contributions
Foreign currency changes
Benefit payments, settlements and transfers
Projected benefit obligation at the end of the year (2)
Component representing future salary increases
Accumulated benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Employer contributions
Plan participants' contributions
Foreign currency changes
Actual return on plan assets
Benefit payments, settlements and transfers
Fair value of plan assets at end of year (2)
Funded status - Deficiency of fair value of plan assets
over projected benefit obligation at end of year
—
596
1,611
143
64
(15)
(1,065)
18,609
(253)
18,356
17,244
105
64
(11)
2,087
(1,065)
18,424
(185)
$
$
$
$
$
—
568
(538)
170
63
25
(1,038)
17,275
(266)
17,009
18,564
70
63
19
(434)
(1,038)
17,244
(31)
$
$
$
$
$
$
$
$
$
$
—
8
(9)
2
—
(3)
(18)
227
—
227
—
—
—
—
—
—
—
(227)
$
$
$
$
$
261
(6)
9
(10)
2
—
8
(17)
247
—
247
—
—
—
—
—
—
—
(247)
(1)
(2)
Substantially all of the pensions' actuarial loss for the year ended December 31, 2019 and actuarial gain for the year ended December 31, 2018 is the result of the change in
the end of year discount rate of the current year versus the prior year (67 basis points decrease for 2019 and 26 basis points increase for 2018).
For the CN Pension Plan, as at December 31, 2019, the projected benefit obligation was $17,252 million (2018 - $16,004 million) and the fair value of plan assets was
$17,523 million (2018 - $16,393 million). The measurement date of all plans is December 31.
Amounts recognized in the Consolidated Balance Sheets
In millions
December 31,
Noncurrent assets - Pension asset
Current liabilities (Note 12)
Noncurrent liabilities - Pension and other postretirement benefits
Total amount recognized
Pensions
Other postretirement benefits
2019
336
—
(521)
(185)
$
$
2018
446
—
(477)
$
(31)
$
2019
—
(15)
(212)
(227)
$
$
2018
—
(17)
(230)
(247)
$
$
Amounts recognized in Accumulated other comprehensive loss (Note 18)
In millions
Net actuarial gain (loss)
Prior service credit (cost)
December 31,
$
$
Pensions
2019
(4,336)
(3)
$
$
Other postretirement benefits
2018
(3,887)
(6)
$
$
2019
14
4
$
$
2018
8
4
CN | 2019 Annual Report 89
Notes to the Consolidated Financial Statements
Information for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets
In millions
Accumulated benefit obligation (1)
Fair value of plan assets (1)
December 31,
$
$
(1)
All of the Company's other postretirement benefit pension plans have an accumulated benefit obligation in excess of plan assets.
Information for defined benefit pension plans with a projected benefit obligation in excess of plan assets
In millions
Projected benefit obligation
Fair value of plan assets
December 31,
$
$
Pensions
2019
676
225
$
$
Pensions
2019
843
322
$
$
2018
714
303
2018
780
303
Components of net periodic benefit cost (income) for defined benefit pension and other postretirement benefit plans
Year ended December 31,
2019
2018
2017
2019
2018
2017
Pensions
Other postretirement benefits
In millions
Current service cost
Other components of net periodic benefit cost (income)
Interest cost
Settlement loss
Expected return on plan assets
Amortization of prior service cost
Amortization of net actuarial loss (gain)
Total Other components of net periodic benefit cost (income)
Net periodic benefit cost (income)
$
143
$
170
$
130
$
2
$
2
$
596
5
568
3
540
—
(1,085)
(1,083)
(1,047)
3
155
(326)
(183)
$
$
3
200
(309)
(139)
$
$
5
182
(320)
(190)
$
$
$
$
8
—
—
—
(3)
5
7
$
$
9
—
—
—
(2)
7
9
$
$
2
8
—
—
—
(3)
5
7
Weighted-average assumptions used in accounting for defined benefit pension and other postretirement benefit plans
December 31,
2019
2018
2017
2019
2018
2017
Pensions
Other postretirement benefits
To determine projected benefit obligation
Discount rate (1)
Rate of compensation increase (2)
To determine net periodic benefit cost (income)
Rate to determine current service cost (3)
Rate to determine interest cost (3)
Rate of compensation increase (2)
Expected return on plan assets (4)
3.10%
2.75%
3.93%
3.47%
2.75%
7.00%
3.77%
2.75%
3.68%
3.15%
2.75%
7.00%
3.51%
2.75%
4.11%
3.15%
2.75%
7.00%
3.14%
2.75%
4.25%
3.68%
2.75%
N/A
4.00%
2.75%
3.83%
3.23%
2.75%
N/A
3.59%
2.75%
4.43%
3.29%
2.75%
N/A
(1)
(2)
(3)
(4)
The Company's discount rate assumption, which is set annually at the end of each year, is determined by management with the aid of third-party actuaries. The discount
rate is used to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments with a rating of AA or better, would
provide the necessary cash flows to pay for pension benefits as they become due. For the Canadian pension and other postretirement benefit plans, future expected benefit
payments are discounted using spot rates based on a derived AA corporate bond yield curve for each maturity year.
The rate of compensation increase is determined by the Company based upon its long-term plans for such increases.
The Company uses the spot rate approach to measure current service cost and interest cost for all defined benefit pension and other postretirement benefit plans. Under
the spot rate approach, individual spot discount rates along the same yield curve used in the determination of the projected benefit obligation are applied to the relevant
projected cash flows at the relevant maturity.
The expected long-term rate of return is determined based on expected future performance for each asset class and is weighted based on the investment policy. For 2019,
the Company used a long-term rate of return assumption of 7.00% on the market-related value of plan assets to compute net periodic benefit cost (income). The Company
has elected to use a market-related value of assets, whereby realized and unrealized gains/losses and appreciation/depreciation in the value of the investments are
recognized over a period of five years, while investment income is recognized immediately. In 2020, the Company will maintain the expected long-term rate of return on plan
assets at 7.00% to reflect management's current view of long-term investment returns.
90 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Expected future benefit payments
The following table provides the expected benefit payments for pensions and other postretirement benefits for the next five years and the
subsequent five-year period:
In millions
2020
2021
2022
2023
2024
Years 2025 to 2029
Pensions
Other postretirement
benefits
$
$
$
$
$
$
1,056
1,060
1,058
1,053
1,046
5,119
$
$
$
$
$
$
16
15
14
14
13
60
Defined contribution and other plans
The Company maintains defined contribution pension plans for certain salaried employees as well as certain employees covered by collective
bargaining agreements. The Company also maintains other plans including a Section 401(k) savings plan for certain U.S. based employees. The
Company's contributions under these plans were expensed as incurred and, in 2019, amounted to $23 million (2018 - $22 million; 2017 - $19
million).
Contributions to multi-employer plan
Under collective bargaining agreements, the Company participates in a multi-employer benefit plan named the Railroad Employees National
Early Retirement Major Medical Benefit Plan which provides certain postretirement health care benefits to certain retirees. The Company's
contributions under this plan were expensed as incurred and amounted to $12 million in 2019 (2018 - $13 million; 2017 - $15 million). The
annual contribution rate for the plan was $164.12 per month per active employee for 2019 (2018 - $176.16). The plan covered 445 retirees in
2019 (2018 - 461 retirees).
16 – Share capital
Authorized capital stock
The authorized capital stock of the Company is as follows:
•
•
•
Unlimited number of Common Shares, without par value
Unlimited number of Class A Preferred Shares, without par value, issuable in series
Unlimited number of Class B Preferred Shares, without par value, issuable in series
Common shares
In millions
Issued common shares
Common shares in Share Trusts
Outstanding common shares
Repurchase of common shares
December 31,
2019
714.1
(1.8)
712.3
2018
727.3
(2.0)
725.3
2017
744.6
(2.0)
742.6
The Company may repurchase its common shares pursuant to a Normal Course Issuer Bid (NCIB) at prevailing market prices plus brokerage
fees, or such other prices as may be permitted by the Toronto Stock Exchange. The Company may repurchase up to 22.0 million common
shares between February 1, 2019 and January 31, 2020 under its NCIB. As at December 31, 2019, the Company had repurchased 12.8 million
common shares under this NCIB.
CN | 2019 Annual Report 91
Notes to the Consolidated Financial Statements
The following table provides the information related to the share repurchases for the years ended December 31, 2019, 2018 and 2017:
In millions, except per share data
Year ended December 31,
Number of common shares repurchased (1)
Weighted-average price per share
Amount of repurchase
2019
14.3
118.70
1,700
$
$
2018
19.0
104.99
2,000
$
$
$
$
2017
20.4
98.27
2,000
(1)
Includes repurchases in the first and second quarters of 2017, pursuant to private agreements between the Company and arm's-length third-party sellers.
See Note 22 - Subsequent events for information on the Company's new NCIB.
Share Trusts
The Company's Share Trusts purchase CN's common shares on the open market, which are used to deliver common shares under either the
Share Units or Employee Share Investment Plans (ESIP) (see Note 17 – Stock-based compensation). Shares purchased by the Share Trusts are
retained until the Company instructs the trustee to transfer shares to the participants. Common shares purchased by the Share Trusts are
accounted for as treasury stock. The Share Trusts may sell shares on the open market to facilitate the remittance of the Company's employee
tax withholding obligations.
The following table provides the information related to the share purchases and settlements by Share Trusts under the Share Units Plan for
the years ended December 31, 2019, 2018 and 2017:
In millions, except per share data
Year ended December 31,
2019
2018
2017
Share purchases by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of purchase
Share settlements by Share Units Plan Share Trusts
Number of common shares
Weighted-average price per share
Amount of settlement
$
$
$
$
—
—
—
0.5
88.23
45
$
$
$
$
0.4
104.87
38
0.4
84.53
31
$
$
$
$
0.5
102.17
55
0.3
77.99
24
For the year ended December 31, 2019, the ESIP Share Trusts purchased 0.3 million common shares for $33 million at a weighted-average price
of $118.83 per share.
92 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
17 – Stock-based compensation
The Company has various stock-based compensation plans for eligible employees. A description of the major plans is provided herein.
The following table provides the stock-based compensation expense for awards under all plans, as well as the related tax benefit and
excess tax benefit recognized in income, for the years ended December 31, 2019, 2018 and 2017:
In millions
Share Units Plan
Voluntary Incentive Deferral Plan (VIDP)
Stock option awards
Employee Share Investment Plan (ESIP)
Total stock-based compensation expense
Income tax impacts of stock-based compensation
Tax benefit recognized in income
Excess tax benefit recognized in income
Share Units Plan
Year ended December 31,
2019
2018
2017
$
$
$
$
26
4
12
15
57
12
23
$
$
$
$
38
—
12
40
90
21
13
$
$
$
$
55
7
13
36
111
29
13
The objective of the Share Units Plan is to enhance the Company's ability to attract and retain talented employees and to provide alignment of
interests between such employees and the shareholders of the Company. Under the Share Units Plan, the Company grants performance share
unit (PSU) awards.
PSU-ROIC awards vest dependent upon the attainment of a target level of return on invested capital (ROIC), as defined by the award
agreement, over the plan period of three years. Such performance vesting criteria results in a performance vesting factor that ranges from 0% to
200% depending on the level of ROIC attained. Payout is conditional upon the attainment of a minimum share price, calculated using the
average of the last three months of the plan period.
PSU-TSR awards vest dependent upon the attainment of a total shareholder return (TSR) market condition over the plan period of three
years. Such performance vesting criteria result in a performance vesting factor that ranges from 0% to 200% depending on the Company's TSR
relative to a Class I Railways peer group and components of the S&P/TSX 60 Index.
PSUs are settled in common shares of the Company, subject to the attainment of their respective vesting conditions, by way of
disbursement from the Share Trusts (see Note 16 – Share capital). The number of shares remitted to the participant upon settlement is equal to
the number of PSUs awarded multiplied by the performance vesting factor less shares withheld to satisfy the participant's withholding tax
requirement.
For the 2017 grant, the level of ROIC attained resulted in a performance vesting factor of 169%, and the level of TSR attained resulted in a
performance vesting factor of 100% for the plan period ended December 31, 2019. The total fair value of the equity settled PSU awards that
vested in 2019 was $45 million (2018 - $42 million; 2017 - $43 million). As the respective vesting conditions under each plan and the minimum
share price condition for the PSU-ROIC awards were met at December 31, 2019, settlement of approximately 0.4 million shares, net of
withholding taxes, is expected to occur in the first quarter of 2020.
CN | 2019 Annual Report 93
Notes to the Consolidated Financial Statements
The following table provides a summary of the activity related to PSU awards:
Outstanding at December 31, 2018
Granted
Settled (3)
Forfeited
Outstanding at December 31, 2019
Nonvested at December 31, 2018
Granted
Vested (4)
Forfeited
Nonvested at December 31, 2019
PSUs-ROIC (1)
PSUs-TSR (2)
Weighted-average
grant date fair value
Units
In millions
Weighted-average
grant date fair value
Units
In millions
1.1
0.4
(0.4)
(0.1)
1.0
0.7
0.4
(0.4)
(0.1)
0.6
$
$
$
$
$
$
$
$
$
$
46.10
70.76
35.11
61.12
58.35
52.18
70.76
53.19
61.12
61.29
0.4
0.1
(0.2)
—
0.3
0.3
0.1
(0.2)
—
0.2
$
$
$
$
$
$
$
$
$
$
100.93
128.20
95.31
116.24
112.08
104.14
128.20
103.36
116.24
117.04
(1)
(2)
(3)
The grant date fair value of equity settled PSUs-ROIC granted in 2019 of $26 million is calculated using a lattice-based valuation model. As at December 31, 2019, total
unrecognized compensation cost related to all outstanding awards was $15 million and is expected to be recognized over a weighted-average period of 1.6 years.
The grant date fair value of equity settled PSUs-TSR granted in 2019 of $16 million is calculated using a Monte Carlo simulation model. As at December 31, 2019, total
unrecognized compensation cost related to all outstanding awards was $9 million and is expected to be recognized over a weighted-average period of 1.6 years.
Equity settled PSUs-ROIC granted in 2016 met the minimum share price condition for settlement and attained a performance vesting factor of 200%. Equity settled PSUs-
TSR granted in 2016 attained a performance vesting factor of 100%. In the first quarter of 2019, these awards were settled, net of the remittance of the participants'
withholding tax obligation of $50 million, by way of disbursement from the Share Trusts of 0.5 million common shares.
(4)
These awards are expected to be settled in the first quarter of 2020.
The following table provides the assumptions used in the valuation of PSU-ROIC awards:
Year of grant
Assumptions
Stock price ($) (2)
Expected stock price volatility (%) (3)
Expected term (years) (4)
Risk-free interest rate (%) (5)
Dividend rate ($) (6)
Weighted-average grant date fair value ($)
2019
110.41
17
3.0
1.75
2.15
70.76
PSUs-ROIC (1)
2018
97.77
18
3.0
1.92
1.82
50.77
2017
91.91
19
3.0
0.98
1.65
53.19
(1)
(2)
(3)
(4)
(5)
(6)
Assumptions used to determine fair value of the equity settled PSU-ROIC awards are on the grant date.
Represents the closing share price on the grant date.
Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
Represents the period of time that awards are expected to be outstanding.
Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
Based on the annualized dividend rate.
94 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Voluntary Incentive Deferral Plan
The Company's Voluntary Incentive Deferral Plan (VIDP) provides eligible senior management employees the opportunity to elect to receive
their annual incentive bonus payment in deferred share units (DSU) up to specific deferral limits. A DSU is equivalent to a common share of the
Company and also earns dividends when normal cash dividends are paid on common shares. The number of DSUs received by each participant
is established at the time of deferral. For each participant, the Company will grant a further 25% of the amount elected in DSUs, which will vest
over a period of four years. The election to receive eligible incentive payments in DSUs is no longer available to a participant when the value of
the participant's vested DSUs is sufficient to meet the Company's stock ownership guidelines.
Equity settled awards
DSUs are settled in common shares of the Company at the time of cessation of employment by way of an open market purchase by the
Company. The number of shares remitted to the participant is equal to the number of DSUs awarded less shares withheld to satisfy the
participant's withholding tax requirement.
Cash settled awards
The value of each participant's DSUs is payable in cash at the time of cessation of employment.
The following table provides a summary of the activity related to DSU awards:
Outstanding at December 31, 2018
Granted
Settled (3)
Outstanding at December 31, 2019 (4)
Equity settled
DSUs (1)
Cash settled
DSUs (2)
Weighted-average
grant date fair value
Units
In millions
0.8
0.1
(0.2)
0.7
$
$
$
$
79.23
113.59
81.22
81.91
Units
In millions
0.2
—
(0.1)
0.1
(1)
(2)
(3)
(4)
The grant date fair value of equity settled DSUs granted in 2019 of $4 million is calculated using the Company's stock price on the grant date. As at December 31, 2019, the
aggregate intrinsic value of all equity settled DSUs outstanding amounted to $77 million.
The fair value of cash settled DSUs as at December 31, 2019 is based on the intrinsic value. As at December 31, 2019, the liability for all cash settled DSUs was $16 million
(2018 - $19 million). The closing stock price used to determine the liability was $117.47. The total fair value of cash settled DSU awards vested in 2019, 2018 and 2017 was
$nil.
For the year ended December 31, 2019 the Company purchased 0.1 million common shares for the settlement of equity settled DSUs, net of the remittance of the
participants' withholding tax obligation of $11 million.
The total fair value of equity settled DSU awards vested, the number of units outstanding that were nonvested, unrecognized compensation cost and the remaining
recognition period for cash and equity settled DSUs have not been quantified as they relate to a minimal number of units.
CN | 2019 Annual Report 95
Notes to the Consolidated Financial Statements
Stock option awards
The Company's stock option plan allows for eligible employees to acquire common shares of the Company upon vesting at a price equal to the
market value of the common shares at the grant date. The options issued by the Company are conventional options that vest over a period of
time. The right to exercise options generally accrues over a period of four years of continuous employment. Options are not generally
exercisable during the first 12 months after the date of grant and expire after 10 years. As at December 31, 2019, 14.9 million common shares
remained authorized for future issuances under these plans.
During the year ended December 31, 2019, the Company granted 0.9 million (2018 - 1.1 million; 2017 - 1.0 million) stock options.
The following table provides the activity of stock option awards during 2019, and for options outstanding and exercisable at December 31,
2019, the weighted-average exercise price:
Options outstanding
Nonvested options
Number of
options
In millions
Weighted-average
exercise price
Number of
options
Weighted-average
grant date fair value
Outstanding at December 31, 2018 (1)
Granted (2)
Forfeited/Cancelled
Exercised (3)
Vested (4)
Outstanding at December 31, 2019 (1)
Exercisable at December 31, 2019 (1)
4.2
0.9
(0.2)
(1.1)
N/A
3.8
1.7
$
$
$
$
$
$
79.73
110.94
102.49
68.15
N/A
86.89
72.22
In millions
$
$
$
$
$
2.3
0.9
(0.2)
N/A
(0.9)
2.1
N/A
13.84
16.34
15.43
N/A
13.31
15.00
N/A
(1)
(2)
(3)
Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date.
The grant date fair value of options awarded in 2019 of $15 million ($16.34 per option) is calculated using the Black-Scholes option-pricing model. As at December 31,
2019, total unrecognized compensation cost related to all outstanding awards was $10 million and is expected to be recognized over a weighted-average period of 2.5
years.
The total intrinsic value of options exercised in 2019 was $53 million (2018 - $78 million; 2017 - $62 million). The cash received upon exercise of options in 2019 was $77
million (2018 - $103 million; 2017 - $58 million) and the related excess tax benefit realized in 2019 was $3 million (2018 - $3 million and 2017 - $ 5 million).
(4)
The grant date fair value of options vested in 2019 was $12 million (2018 - 12 million and 2017 - $10 million).
The following table provides the number of stock options outstanding and exercisable as at December 31, 2019 by range of exercise price
and their related intrinsic value, and for options outstanding, the weighted-average years to expiration. The table also provides the aggregate
intrinsic value for in-the-money stock options, which represents the value that would have been received by option holders had they exercised
their options on December 31, 2019 at the Company's closing stock price of $117.47.
Options outstanding
Options exercisable
Weighted-
average years
to expiration
Weighted-
average
exercise price
Aggregate
intrinsic
value
Number of
options
Weighted-
average
exercise price
In millions
In millions
Aggregate
intrinsic
value
In millions
1.5
3.3
5.7
7.4
9.1
6.7
$
$
$
$
$
$
$
35.95
54.93
74.77
95.00
110.77
16
24
35
33
6
86.89
$
114
0.2
0.4
0.6
0.5
—
1.7
$
$
$
$
$
$
$
35.95
54.93
76.01
93.17
115.48
72.22
$
16
24
24
12
—
76
Number of
options
In millions
0.2
0.4
0.8
1.5
0.9
3.8
Range of exercise prices
$ 27.33 - $ 45.00
$ 45.01 - $ 65.00
$ 65.01 - $ 85.00
$ 85.01 - $ 105.00
$ 105.01 - $ 126.35
Balance at December 31, 2019 (1)
(1)
Stock options with a US dollar exercise price have been translated to Canadian dollars using the foreign exchange rate in effect at the balance sheet date. The weighted-
average years to expiration of exercisable stock options was 5 years.
96 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
The following table provides the assumptions used in the valuation of stock option awards:
Year of grant
Assumptions
Grant price ($)
Expected stock price volatility (%) (1)
Expected term (years) (2)
Risk-free interest rate (%) (3)
Dividend rate ($) (4)
Weighted-average grant date fair value ($)
2019
110.94
18
5.5
1.75
2.15
16.34
2018
98.05
18
5.5
2.08
1.82
15.34
2017
92.16
20
5.5
1.24
1.65
14.44
(1)
(2)
(3)
(4)
Based on the historical volatility of the Company's stock over a period commensurate with the expected term of the award.
Represents the period of time that awards are expected to be outstanding. The Company uses historical data to predict option exercise behavior.
Based on the implied yield available on zero-coupon government issues with an equivalent term commensurate with the expected term of the awards.
Based on the annualized dividend rate.
Stock price volatility
The Company's liability for the cash settled VIDP is marked-to-market at each period-end and varies with the Company's share price.
Fluctuations in the Company's share price cause volatility to stock-based compensation expense as recorded in Net income. The Company
does not currently hold any derivative financial instruments to manage this exposure.
Employee Share Investment Plan
The Company has an Employee Share Investment Plan (ESIP) giving eligible employees the opportunity to subscribe for up to 10% of their gross
salaries to purchase shares of the Company's common stock on the open market and to have the Company invest, on the employees' behalf, a
further 35% of the amount invested by the employees, up to 6% of their gross salaries.
Beginning January 1, 2019, Company contributions to the ESIP, which consist of shares purchased on the open market, are subject to a
one-year vesting period and are forfeited should certain participant contributions be sold or disposed of prior to vesting. Company contributions
to the ESIP are held in Share Trusts until vesting, at which time shares are delivered to the employee.
The following table provides a summary of the activity related to the ESIP for 2019:
Unvested contributions, December 31, 2018
Company contributions (1)
Unvested contributions, December 31, 2019
(1)
The weighted average fair value of the shares contributed was $118.83.
ESIP
Shares
In millions
—
0.3
0.3
The following table provides the number of participants holding shares, the total number of ESIP shares purchased on behalf of
employees, including the Company's contributions for the years ended December 31, 2019, 2018 and 2017:
Number of participants holding shares
Total number of ESIP shares purchased on behalf of employees (millions)
Year ended December 31,
2019
21,674
1.5
2018
22,185
1.8
2017
19,642
1.7
CN | 2019 Annual Report 97
Notes to the Consolidated Financial Statements
18 – Accumulated other comprehensive loss
In millions
Foreign
currency
translation
adjustments
Pension
and other
postretirement
benefit plans
Total
before
tax
Income tax
recovery
(expense) (1)
Total
net of
tax
Balance at December 31, 2016
$
(247)
$
(2,898)
$
(3,145)
$
787
$
(2,358)
Other comprehensive income (loss) before
reclassifications:
Foreign exchange loss on translation of net
investment in foreign operations
Foreign exchange gain on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial loss arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Other comprehensive loss
Balance at December 31, 2017
Other comprehensive income (loss) before
reclassifications:
Foreign exchange gain on translation of net
investment in foreign operations
Foreign exchange loss on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial loss arising during the year
Prior service credit arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Settlement loss arising during the year
Other comprehensive income (loss)
Balance at December 31, 2018
Other comprehensive income (loss) before
reclassifications:
Foreign exchange loss on translation of net
investment in foreign operations
Foreign exchange gain on translation of US dollar-
denominated debt designated as a hedge of the net
investment in foreign operations
Actuarial loss arising during the year
Amounts reclassified from Accumulated other
comprehensive loss:
Amortization of net actuarial loss
Amortization of prior service costs
Settlement loss arising during the year
(701)
504
(197)
(444)
1,038
(635)
403
(41)
(636)
380
Other comprehensive income (loss)
(256)
(701)
—
(701)
504
(408)
179 (2)
5 (2)
(421)
(3,566)
(67)
110
(47) (3)
(1) (3)
(5)
782
437
(298)
132
4
(426)
(2,784)
1,038
—
1,038
(635)
(969)
6
198 (2)
3 (2)
3 (2)
(356)
(3,922)
86
262
(2)
(54) (3)
— (3)
(1) (3)
291
1,073
(549)
(707)
4
144
3
2
(65)
(2,849)
(636)
—
(636)
380
(600)
152 (2)
3 (2)
5 (2)
(696)
(52)
155
(39) (3)
(1) (3)
(1) (3)
62
328
(445)
113
2
4
(634)
(408)
179
5
(224)
(3,122)
(969)
6
198
3
3
(759)
(3,881)
(600)
152
3
5
(440)
Balance at December 31, 2019
$
(297)
$
(4,321)
$
(4,618)
$
1,135
$
(3,483)
(1)
(2)
The Company releases stranded tax effects from Accumulated other comprehensive loss to Net income upon the liquidation or termination of the related item.
Reclassified to Other components of net periodic benefit income in the Consolidated Statements of Income and included in net periodic benefit cost. See Note 15 -
Pensions and other postretirement benefits.
(3)
Included in Income tax recovery (expense) in the Consolidated Statements of Income.
98 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
19 – Major commitments and contingencies
Purchase commitments
As at December 31, 2019, the Company had fixed and variable commitments to purchase rail, information technology services and licenses,
locomotives, wheels, engineering services, railroad ties, rail cars, as well as other equipment and services with a total estimated cost of $1,621
million. Costs of variable commitments were estimated using forecasted prices and volumes.
Contingencies
In the normal course of business, the Company becomes involved in various legal actions seeking compensatory and occasionally punitive
damages, including actions brought on behalf of various purported classes of claimants and claims relating to employee and third-party
personal injuries, occupational disease and property damage, arising out of harm to individuals or property allegedly caused by, but not limited
to, derailments or other accidents.
Canada
Employee injuries are governed by the workers' compensation legislation in each province whereby employees may be awarded either a lump
sum or a future stream of payments depending on the nature and severity of the injury. As such, the provision for employee injury claims is
discounted. In the provinces where the Company is self-insured, costs related to employee work-related injuries are accounted for based on
actuarially developed estimates of the ultimate cost associated with such injuries, including compensation, health care and third-party
administration costs. An actuarial study is generally performed at least on a triennial basis. For all other legal actions, the Company maintains,
and regularly updates on a case-by-case basis, provisions for such items when the expected loss is both probable and can be reasonably
estimated based on currently available information.
In 2019, 2018 and 2017 the Company recorded a decrease of $7 million, and an increase of $4 million and $2 million, respectively, to its
provision for personal injuries in Canada as a result of actuarial valuations for employee injury claims.
As at December 31, 2019, 2018 and 2017, the Company's provision for personal injury and other claims in Canada was as follows:
In millions
Beginning of year
Accruals and other
Payments
End of year
Current portion - End of year
United States
2019
207
29
(29)
207
55
$
$
$
2018
183
52
(28)
207
60
$
$
$
2017
183
38
(38)
183
40
$
$
$
Personal injury claims by the Company's employees, including claims alleging occupational disease and work-related injuries, are subject to the
provisions of the Federal Employers' Liability Act (FELA). Employees are compensated under FELA for damages assessed based on a finding of
fault through the U.S. jury system or through individual settlements. As such, the provision is undiscounted. With limited exceptions where
claims are evaluated on a case-by-case basis, the Company follows an actuarial-based approach and accrues the expected cost for personal
injury, including asserted and unasserted occupational disease claims, and property damage claims, based on actuarial estimates of their
ultimate cost. An actuarial study is performed annually.
For employee work-related injuries, including asserted occupational disease claims, and third-party claims, including grade crossing,
trespasser and property damage claims, the actuarial valuation considers, among other factors, the Company's historical patterns of claims
filings and payments. For unasserted occupational disease claims, the actuarial valuation includes the projection of the Company's experience
into the future considering the potentially exposed population. The Company adjusts its liability based upon management's assessment and the
results of the study. On an ongoing basis, management reviews and compares the assumptions inherent in the latest actuarial valuation with
the current claim experience and, if required, adjustments to the liability are recorded.
Due to the inherent uncertainty involved in projecting future events, including events related to occupational diseases, which include but
are not limited to, the timing and number of actual claims, the average cost per claim and the legislative and judicial environment, the
Company's future payments may differ from current amounts recorded.
In 2019, the Company recorded an increase of $2 million to its provision for U.S. personal injury and other claims attributable to third-party
claims, occupational disease claims and non-occupational disease claims pursuant to the 2019 actuarial valuation. In 2018 and 2017, actuarial
valuations resulted in an increase of $13 million and $15 million, respectively. The prior years' adjustments from the actuarial valuations were
mainly attributable to non-occupational disease claims, third-party claims and occupational disease claims reflecting changes in the Company's
estimates of unasserted claims and costs related to asserted claims. The Company has an ongoing risk mitigation strategy focused on
CN | 2019 Annual Report 99
Notes to the Consolidated Financial Statements
reducing the frequency and severity of claims through injury prevention and containment; mitigation of claims; and lower settlements of
existing claims.
As at December 31, 2019, 2018 and 2017, the Company's provision for personal injury and other claims in the U.S. was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2019
2018
2017
$
$
$
139
$
116
$
44
(31)
(7)
145
36
$
$
41
(28)
10
139
37
$
$
118
46
(41)
(7)
116
25
Although the Company considers such provisions to be adequate for all its outstanding and pending claims, the final outcome with respect
to actions outstanding or pending at December 31, 2019, or with respect to future claims, cannot be reasonably determined. When establishing
provisions for contingent liabilities the Company considers, where a probable loss estimate cannot be made with reasonable certainty, a range
of potential probable losses for each such matter, and records the amount it considers the most reasonable estimate within the range.
However, when no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. For
matters where a loss is reasonably possible but not probable, a range of potential losses cannot be estimated due to various factors which may
include the limited availability of facts, the lack of demand for specific damages and the fact that proceedings were at an early stage. Based on
information currently available, the Company believes that the eventual outcome of the actions against the Company will not, individually or in
the aggregate, have a material adverse effect on the Company's financial position. However, due to the inherent inability to predict with certainty
unforeseeable future developments, there can be no assurance that the ultimate resolution of these actions will not have a material adverse
effect on the Company's results of operations, financial position or liquidity.
Environmental matters
The Company's operations are subject to numerous federal, provincial, state, municipal and local environmental laws and regulations in Canada
and the U.S. concerning, among other things, emissions into the air; discharges into waters; the generation, handling, storage, transportation,
treatment and disposal of waste, hazardous substances, and other materials; decommissioning of underground and aboveground storage
tanks; and soil and groundwater contamination. A risk of environmental liability is inherent in railroad and related transportation operations; real
estate ownership, operation or control; and other commercial activities of the Company with respect to both current and past operations.
Known existing environmental concerns
The Company is or may be liable for remediation costs at individual sites, in some cases along with other potentially responsible parties,
associated with actual or alleged contamination. The ultimate cost of addressing these known contaminated sites cannot be definitively
established given that the estimated environmental liability for any given site may vary depending on the nature and extent of the
contamination; the nature of anticipated response actions, taking into account the available clean-up techniques; evolving regulatory standards
governing environmental liability; and the number of potentially responsible parties and their financial viability. As a result, liabilities are
recorded based on the results of a four-phase assessment conducted on a site-by-site basis. A liability is initially recorded when environmental
assessments occur, remedial efforts are probable, and when the costs, based on a specific plan of action in terms of the technology to be used
and the extent of the corrective action required, can be reasonably estimated. The Company estimates the costs related to a particular site
using cost scenarios established by external consultants based on the extent of contamination and expected costs for remedial efforts. In the
case of multiple parties, the Company accrues its allocable share of liability taking into account the Company's alleged responsibility, the
number of potentially responsible parties and their ability to pay their respective share of the liability. Adjustments to initial estimates are
recorded as additional information becomes available.
The Company's provision for specific environmental sites is undiscounted and includes costs for remediation and restoration of sites, as
well as monitoring costs. Environmental expenses, which are classified as Casualty and other in the Consolidated Statements of Income,
include amounts for newly identified sites or contaminants as well as adjustments to initial estimates. Recoveries of environmental remediation
costs from other parties are recorded as assets when their receipt is deemed probable.
100 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
As at December 31, 2019, 2018 and 2017, the Company's provision for specific environmental sites was as follows:
In millions
Beginning of year
Accruals and other
Payments
Foreign exchange
End of year
Current portion - End of year
2019
2018
2017
$
$
$
61
31
(34)
(1)
57
38
$
$
$
78
16
(34)
1
61
39
$
$
$
86
16
(23)
(1)
78
57
The Company anticipates that the majority of the liability at December 31, 2019 will be paid out over the next five years. Based on the
information currently available, the Company considers its provisions to be adequate.
Unknown existing environmental concerns
While the Company believes that it has identified the costs likely to be incurred for environmental matters based on known information, the
discovery of new facts, future changes in laws, the possibility of releases of hazardous materials into the environment and the Company's
ongoing efforts to identify potential environmental liabilities that may be associated with its properties may result in the identification of
additional environmental liabilities and related costs. The magnitude of such additional liabilities and the costs of complying with future
environmental laws and containing or remediating contamination cannot be reasonably estimated due to many factors, including:
•
•
•
•
the lack of specific technical information available with respect to many sites;
the absence of any government authority, third-party orders, or claims with respect to particular sites;
the potential for new or changed laws and regulations and for development of new remediation technologies and uncertainty regarding the
timing of the work with respect to particular sites; and
the determination of the Company's liability in proportion to other potentially responsible parties and the ability to recover costs from any
third parties with respect to particular sites.
Therefore, the likelihood of any such costs being incurred or whether such costs would be material to the Company cannot be determined at
this time. There can thus be no assurance that liabilities or costs related to environmental matters will not be incurred in the future, or will not
have a material adverse effect on the Company's financial position or results of operations in a particular quarter or fiscal year, or that the
Company's liquidity will not be adversely impacted by such liabilities or costs, although management believes, based on current information,
that the costs to address environmental matters will not have a material adverse effect on the Company's financial position or liquidity. Costs
related to any unknown existing or future contamination will be accrued in the period in which they become probable and reasonably estimable.
Future occurrences
In railroad and related transportation operations, it is possible that derailments or other accidents, including spills and releases of hazardous
materials, may occur that could cause harm to human health or to the environment. As a result, the Company may incur costs in the future,
which may be material, to address any such harm, compliance with laws and other risks, including costs relating to the performance of clean-
ups, payment of environmental penalties and remediation obligations, and damages relating to harm to individuals or property.
Regulatory compliance
The Company may incur significant capital and operating costs associated with environmental regulatory compliance and clean-up
requirements, in its railroad operations and relating to its past and present ownership, operation or control of real property. Operating expenses
related to regulatory compliance activities for environmental matters for the year ended December 31, 2019 amounted to $25 million (2018 -
$22 million; 2017 - $20 million). In addition, based on the results of its operations and maintenance programs, as well as ongoing environmental
audits and other factors, the Company plans for specific capital improvements on an annual basis. Certain of these improvements help ensure
facilities, such as fueling stations, waste water and storm water treatment systems, comply with environmental standards and include new
construction and the updating of existing systems and/or processes. Other capital expenditures relate to assessing and remediating certain
impaired properties. The Company's environmental capital expenditures for the year ended December 31, 2019 amounted to $25 million (2018 -
$19 million; 2017 - $21 million).
Guarantees and indemnifications
In the normal course of business, the Company enters into agreements that may involve providing guarantees or indemnifications to third
parties and others, which may extend beyond the term of the agreements. These include, but are not limited to, standby letters of credit, surety
and other bonds, and indemnifications that are customary for the type of transaction or for the railway business.
CN | 2019 Annual Report 101
Notes to the Consolidated Financial Statements
As at December 31, 2019, the Company had outstanding letters of credit of $424 million (2018 - $410 million) under the committed
bilateral letter of credit facilities and $149 million (2018 - $137 million) under the uncommitted bilateral letter of credit facilities, and surety and
other bonds of $169 million (2018 - $160 million), all issued by financial institutions with investment grade credit ratings to third parties to
indemnify them in the event the Company does not perform its contractual obligations.
As at December 31, 2019, the maximum potential liability under these guarantee instruments was $742 million (2018 - $707 million), of
which $681 million (2018 - $659 million) related to other employee benefit liabilities and workers' compensation and $61 million (2018 - $48
million) related to other liabilities. The guarantee instruments expire at various dates between 2020 and 2022.
As at December 31, 2019, the Company had not recorded a liability with respect to guarantees as the Company did not expect to make any
payments under its guarantees.
General indemnifications
In the normal course of business, the Company provides indemnifications, customary for the type of transaction or for the railway business, in
various agreements with third parties, including indemnification provisions where the Company would be required to indemnify third parties and
others. During the year, the Company entered into various contracts with third parties for which an indemnification was provided. Due to the
nature of the indemnification clauses, the maximum exposure for future payments cannot be reasonably determined. To the extent of any
actual claims under these agreements, the Company maintains provisions for such items, which it considers to be adequate. As at December
31, 2019, the Company had not recorded a liability with respect to any indemnifications.
20 – Financial instruments
Risk management
In the normal course of business, the Company is exposed to various risks from its use of financial instruments. To manage these risks, the
Company follows a financial risk management framework, which is monitored and approved by the Company's Finance Committee, with a goal
of maintaining a strong balance sheet, optimizing earnings per share and free cash flow, financing its operations at an optimal cost of capital
and preserving its liquidity. The Company has limited involvement with derivative financial instruments in the management of its risks and does
not hold or issue them for trading or speculative purposes.
Foreign currency risk
The Company conducts its business in both Canada and the U.S. and as a result, is affected by currency fluctuations. Changes in the exchange
rate between the Canadian dollar and the US dollar affect the Company's revenues and expenses. To manage foreign currency risk, the
Company designates US dollar-denominated debt of the parent company as a foreign currency hedge of its net investment in foreign
operations. As a result, from the dates of designation, foreign exchange gains and losses on translation of the Company's US dollar-
denominated debt are recorded in Accumulated other comprehensive loss, which minimizes volatility of earnings resulting from the conversion
of US dollar-denominated debt into the Canadian dollar.
The Company also enters into foreign exchange forward contracts to manage its exposure to foreign currency risk. As at December 31,
2019, the Company had outstanding foreign exchange forward contracts with a notional value of US$1,088 million (2018 - US$1,465 million).
Changes in the fair value of foreign exchange forward contracts, resulting from changes in foreign exchange rates, are recognized in Other
income in the Consolidated Statement of Income as they occur. For the year ended December 31, 2019, the Company recorded a loss of $75
million (2018 - gain of $157 million; 2017 - loss of $72 million) related to foreign exchange forward contracts. These gains or losses were
largely offset by the re-measurement of US dollar-denominated monetary assets and liabilities recognized in Other income. As at December 31,
2019, the fair value of outstanding foreign exchange forward contracts included in Other current assets and Accounts payable and other was
$nil and $24 million, respectively (2018 - $67 million and $nil, respectively).
Interest rate risk
The Company is exposed to interest rate risk, which is the risk that the fair value or future cash flows of a financial instrument will vary as a
result of changes in market interest rates. Such risk exists in relation to the Company's debt. The Company mainly issues fixed-rate debt, which
exposes the Company to variability in the fair value of the debt. The Company also issues debt with variable interest rates, which exposes the
Company to variability in interest expense.
To manage interest rate risk, the Company manages its borrowings in line with liquidity needs, maturity schedule, and currency and interest
rate profile. In anticipation of future debt issuances, the Company may use derivative instruments such as forward rate agreements. The
Company does not currently hold any significant derivative instruments to manage its interest rate risk.
102 CN | 2019 Annual Report
Notes to the Consolidated Financial Statements
Fair value of financial instruments
The financial instruments that the Company measures at fair value on a recurring basis in periods subsequent to initial recognition are
categorized into the following levels of the fair value hierarchy based on the degree to which inputs are observable:
•
•
•
Level 1: Inputs are quoted prices for identical instruments in active markets
Level 2: Significant inputs (other than quoted prices included in Level 1) are observable
Level 3: Significant inputs are unobservable
The carrying amounts of Cash and cash equivalents and Restricted cash and cash equivalents approximate fair value. These financial
instruments include highly liquid investments purchased three months or less from maturity, for which the fair value is determined by reference
to quoted prices in active markets.
The carrying amounts of Accounts receivable, Other current assets, and Accounts payable and other approximate fair value. The fair value
of these financial instruments is not determined using quoted prices, but rather from market observable information. The fair value of derivative
financial instruments, classified as Level 2, used to manage the Company's exposure to foreign currency risk and included in Other current
assets and Accounts payable and other is measured by discounting future cash flows using a discount rate derived from market data for
financial instruments subject to similar risks and maturities.
The carrying amount of the Company's debt does not approximate fair value. The fair value is estimated based on quoted market prices for
the same or similar debt instruments, as well as discounted cash flows using current interest rates for debt with similar terms, company rating,
and remaining maturity. The Company classifies debt as Level 2. As at December 31, 2019, the Company's debt, excluding finance leases, had a
carrying amount of $13,662 million (2018 - $12,540 million) and a fair value of $15,667 million (2018 - $13,287 million).
21 – Segmented information
The Company manages its operations as one business segment over a single network that spans vast geographic distances and territories,
with operations in Canada and the U.S. Financial information reported at this level, such as revenues, operating income, and cash flow from
operations, is used by the Company's management, including its chief operating decision-maker, in evaluating financial and operational
performance and allocating resources across CN's network.
The Company's strategic initiatives, which drive its operational direction, are developed and managed centrally by management and are
communicated to its regional activity centers (the Western Region and Eastern Region). The Company's management is responsible for, among
others, CN's marketing strategy, the management of large customer accounts, overall planning and control of infrastructure and rolling stock,
the allocation of resources, and other functions such as financial planning, accounting and treasury.
The role of each region is to manage the day-to-day service requirements within their respective territories and control direct costs incurred
locally. Such cost control is required to ensure that pre-established efficiency standards set at the corporate level are met. The regions execute
the overall corporate strategy and operating plan established by the Company's management, as the regions' management of throughput and
control of direct costs does not serve as the platform for the Company's decision-making process. Approximately 95% of the Company's freight
revenues are from national accounts for which freight traffic spans North America and touches various commodity groups. As a result, the
Company does not manage revenues on a regional basis since a large number of the movements originate in one region and pass through and/
or terminate in another region.
•
•
•
•
The regions also demonstrate common characteristics in each of the following areas:
each region's sole business activity is the transportation of freight over the Company's extensive rail network;
the regions service national accounts that extend over the Company's various commodity groups and across its rail network;
the services offered by the Company stem predominantly from the transportation of freight by rail with the goal of optimizing the rail
network as a whole; and
the Company and its subsidiaries, not its regions, are subject to regulatory regimes in both Canada and the U.S.
For the years ended December 31, 2019, 2018, and 2017, no major customer accounted for more than 10% of total revenues and the
largest freight customer represented approximately 3% of total annual freight revenues.
CN | 2019 Annual Report 103
Notes to the Consolidated Financial Statements
The following tables provide information by geographic area:
In millions
Revenues
Canada
U.S.
Total revenues
Net income
Canada
U.S.
Total net income
In millions
Properties
Canada
U.S.
Total properties
22 – Subsequent events
Normal course issuer bid
Year ended December 31,
2019
2018
2017
$
$
$
$
8,794
4,247
13,041
2,857
2,627
5,484
$
$
$
$
$
$
10,167
4,750
14,917
3,131
1,085
4,216
2019
21,482
18,187
39,669
$
$
$
$
$
$
9,610
4,711
14,321
3,163
1,165
4,328
2018
19,737
18,036
37,773
December 31,
On January 28, 2020, the Board of Directors of the Company approved a new NCIB, which allows for the repurchase of up to 16 million common
shares between February 1, 2020 and January 31, 2021.
Non-revolving credit facility
On January 24, 2020, the Company requested a borrowing of US$300 million under its non-revolving credit facility. The funds are expected to be
received on February 3, 2020.
104 CN | 2019 Annual Report
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